Trump's economic plans could strengthen dollar, hurting international trade

The election of Donald Trump as President of the United States has sparked optimism in American stock markets, with the S&P 500 (Standard and Poor) hitting record highs in early November.

Investors anticipate that Trump’s policies, particularly tax cuts and deregulation, will boost corporate profits, Caliber.Az reports, citing foreign media.

However, this could lead to higher government borrowing, increased deficits, and rising inflation, which may force the Federal Reserve to maintain elevated interest rates. In turn, higher US rates are making dollar-denominated assets more attractive, driving up the value of the dollar.

A stronger dollar typically signals economic uncertainty, as it encourages investors to move into safe-haven assets like the greenback and US Treasuries. Historically, a rising dollar has been detrimental to global growth. According to IMF research from 2023, a 10% increase in the dollar’s value can reduce output in emerging economies by nearly 2%, with rich nations seeing a 0.6% decline. The effects of a stronger dollar tend to linger for years, particularly in emerging markets.

The global economy is affected in two main ways: trade and finance. More than 40% of global trade is conducted in dollars, and a stronger dollar makes imports more expensive, dampening demand and reducing overall trade volumes. As a result, regions such as Asia and Latin America are especially sensitive to fluctuations in the greenback's value. A study from 2020 found that a 1% rise in the dollar’s value against all currencies predicts a 0.6% decline in global trade

Financially, countries and firms with dollar-denominated debt are hit hardest, as a stronger dollar increases their debt burden and interest costs. Higher US rates also discourage investment in other regions, leading to capital outflows from emerging markets and forcing these countries to raise their interest rates, tightening monetary conditions just when their economies are most vulnerable.

Although Trump has frequently criticised a strong dollar for hurting US manufacturers, the reality is that as long as US interest rates remain high, the greenback is likely to remain a haven for investors, posing a continued challenge to global growth.

Notably, as of the beginning of November, the dollar index has climbed above 105.6, reaching its highest level in more than four months, as "Trump trades" continued to dominate financial markets. Expectations of a second Trump presidency, coupled with a potential Republican sweep of Parliament, have fuelled optimism for deregulation and tax cuts, which could stimulate economic growth and drive up inflation. This, in turn, may limit the Bank of England's ability to reduce interest rates.

Trump’s pledges to raise tariffs on key trading partners, particularly China and the European Union, as well as his plans to tighten immigration, have added to concerns over inflationary pressures. Looking ahead, investors are focused on the latest US inflation data, due this week, which will provide further insight into the economic outlook. Additionally, fresh commentary from Federal Reserve officials is expected to influence market expectations. The pound strengthened broadly, with the euro and yuan falling to multi-month lows against the dollar.

By Khagan Isayev