Trump Comeback: The US Dollar Surges While Bonds and Emerging Markets Tremble

Donald Trump's political comeback as the US President could not only give a substantial boost to the US dollar but also invigorate the stock market. However, experts are concerned that Trump's impending presidency could be burdensome for bonds, emerging markets, and the sector of clean energy and sustainable investments. Trump's economic policy approaches, which include higher inflation and growth through tax cuts, could force the US Federal Reserve to keep interest rates high to avoid an overheating of the economy. This would further strengthen the dollar. Specifically, his plans to introduce tariffs and demand that European allies contribute more to their defense are expected to dampen growth in other countries, which could increase the dollar's attractiveness. Analysts at Citi forecast a 3% rise in the dollar following a Trump election victory. This contrasts with expectations of a significant decline in the euro, possibly below the significant 1-dollar threshold, should Trump follow in the footsteps of his protectionist measures. The Chinese yuan could also continue to depreciate as it did from 2018-2020. In this environment, higher dollar yields might encourage the return of carry trades. Currencies like the Japanese yen and the Swiss franc are already under selling pressure ahead of the election. Nonetheless, the franc remains stable due to its high-quality exports and strength during times of increased inflation. Cryptocurrency directions are also interesting: with a potentially softer regulatory course from a Trump administration on digital currencies, Bitcoin could continue to benefit, having recently reached a record high. Regarding the stock market, Trump's promises of less regulation, lower corporate taxes, and increased oil production would enhance growth prospects. Particularly banks, technology, defense, and fossil fuels could reap benefits. A reduction in the corporate tax rate from 21% to 15% estimated by Goldman Sachs could increase S&P 500 earnings by about 4%. Although Trump plans to cut corporate taxes, it remains unclear how much of this will actually pass through Congress. His protectionist measures and strict stance on China could, however, increase costs, reduce profitability, and strain multinational companies. On the international level, a strong dollar and rising US interest rates will lead to defensive sectors outperforming, while multinational companies with US market exposure will face setbacks.