What would a second Trump presidency mean for currency markets?

The 2024 US election could have a huge impact on the US dollar - Editorial credit: Christopher Sciacca via Shutterstock

It seems almost inevitable that Donald Trump will face off with Joe Biden in the 2024 presidential elections. The battle of the oldest president against the only one to ever face criminal charges may not be the battle America wants, but it is the one it will surely get.

Last week, a Colorado court disqualified Trump’s name from appearing on the state’s Republican primary ballot. That ruling was based on a clause in the 14^th amendment, created to prevent confederate generals from holding office. The Supreme Court are likely to strike that ruling down along with an identical decision from a Maine court yesterday. With Republican candidates running in treacle, Biden and Trump will therefore surely return for a rerun of the previous election.

Currency experts are looking at the election with apprehension. With so much on the line, what would a Trump victory mean for currency markets? We take a look in this blog.

Even more Trumpian

Many commentators expect Trump to lean further into his authoritarian streak in a second term. The tariffs he levelled on China could be redoubled, while political retribution against those who countered his election lies seems a surety. With the Supreme Court stacked with conservative justices, there is a concerning sense that Trump might be free to act with relative impunity.

It is almost impossible to say how currency markets would react. However, Trump’s protectionist policies could cause inflation to bounce up again, weakening the US dollar. For all his failings, Trump did preside over a record period for US stock markets, although whether that could be replicated during a global downturn is up for debate.

Take a look at this chart below, which shows GBP/USD in the last nine months of 2020 and into 2021. Sterling was on an upward trajectory throughout, but the peaks and valleys speak to the political uncertainty that marked the last election. 2021 began with the storming of the US capitol in Washington DC, and markets will be hoping to avoid a repeat of those ugly scenes this time around.

Regardless, a second Trump term is likely to see him adopt a tougher stance on issues (if that were even possible). Markets could easily be spooked by a man not exactly renowned for keeping his thoughts to himself.

Any port in a storm

Much of the US dollar’s success over the past few decades has been in its perception as a safe-haven currency. If Trump were to gain re-election, that perception could be on the chopping block. The ripples of the January 6^th insurrection are sure to become much larger if Trump wins.

If institutional members of financial markets begin to doubt the soundness of American democracy, they could look to other markets to build currency reserves. China has long sought to boost its renminbi yuan to the status of safe-haven. However, concerns about the human rights situation in Xinjiang and a potential facedown with the US over the Taiwan have so far slowed that process.

The US dollar’s status as the world’s pre-eminent currency will come under threat if the political landscape remains cast in a mould of anxieties and suspicions. Trump is many things, but one thing he certainly is not is a deft, sensitive diplomat. He is expected to be hard on China and vague on Ukraine, which could throw more wood on a rapidly growing global fire. The US dollar is at risk of losing value due to his volatility.

A huge 2024

It goes without saying that 2024 is a massive year for the United States. Indeed, the same is true for democracy across the globe, as over 52 elections are being held in some of the world’s largest economies.

Fluctuations in currency markets are therefore almost guaranteed. Don’t be surprised if the US dollar loses ground to its peers as markets digest what a second Trump presidency would mean. Strap yourself in for a wild ride.

Sweeping shifts in the political landscape will inevitably result in volatility. Smart Currency’s goal is to protect your money from market fluctuations through a range of solutions, from market options to forward contracts. Be sure to check out our SmartHedge feature as well, which allows your firm to visualise and adjust its currency exposures in real time.

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