Impending US Presidential Elections and Global Market Reactions
As the US presidential elections draw near, scheduled for 5 November, financial markets around the world are experiencing heightened anxiety. Investors are particularly concerned about potential alterations in US trade policy that could create significant ripple effects across various currencies and asset classes. Current polling indicates a tightly contested race between Democrat Kamala Harris and Republican Donald Trump, yet betting markets are increasingly leaning towards Trump, now assigning him a 62% probability of securing victory.
A Trump presidency could resurrect a host of protectionist trade measures, potentially including a proposed 10% tariff on imports from Europe and a staggering 60% tariff on Chinese goods. Such moves could elicit retaliatory actions from the European Commission, which might respond with reciprocal tariffs on American exports. The prospect of sweeping protectionist policies raises serious concerns about the implications for the euro and other global currencies, prompting analysts to assess the potential market consequences.
Impact of a Trump Victory on the Euro
Market analysts warn that the reinstatement of broad US tariffs could bolster the US dollar while exerting downward pressure on the euro. Michael Cahill, a prominent analyst at Goldman Sachs, noted in a recent report, “Tariffs have a direct influence on exchange rates.” If Trump wins and the Republicans gain congressional control, Goldman Sachs anticipates a strong case for a “hawkish Dollar response,” particularly if tariffs are accompanied by domestic tax cuts.
“The combined impact of higher tariffs and tax cuts could propel the dollar upward, especially if the US implements a baseline tariff across the board,” Cahill elaborated. This shift in policy would also have significant repercussions for monetary policy on both sides of the Atlantic. Jan Hatzius, Goldman Sachs’ chief economist, estimated that a 10% across-the-board tariff could result in a 150-200 basis point shift in the interest rate differential between the US and the Eurozone. “In the US, this would likely create a hawkish impact of around 130bp due to the inflationary pressures from tariffs,” Hatzius explained, while “the Eurozone would face a slightly dovish scenario, estimated at -40bp, as the growth implications would overshadow any minor inflationary effects from tariffs.”
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The resulting divergence in monetary policy could potentially weaken the euro by as much as 3%, or even reach up to 10% in a scenario involving broader tariffs and tax cuts. As the euro has already endured four consecutive weeks of losses, ING’s FX analyst Francesco Pesole pointed out that its recent struggles are primarily driven by economic data divergence rather than electoral uncertainties. The US dollar has gained traction due to robust consumer spending and optimistic growth revisions.
Pesole further indicated that for Trump-related risks to be regarded as a significant factor, the euro would need to decline another 2% from its short-term fair value of 1.08. Beyond the euro, Trump’s proposed tariffs could induce volatility in other currencies, particularly those linked to commodity exports and emerging markets. ING analysts have highlighted that the Australian and New Zealand dollars may experience pronounced fluctuations within the G10 group, while the Mexican peso and several Asian currencies could be particularly vulnerable to trade-related changes.
According to analysts at BBVA, a Trump administration might introduce further economic and geopolitical uncertainties by reevaluating US commitments to NATO and Ukraine, a perspective that could exert additional pressure on the euro.
Challenges for Europe’s Economy and the ECB
If Trump secures victory in the US election and implements his aggressive tariff policies, the euro is likely to face a prolonged downward trajectory against the dollar. Europe’s already sluggish economic growth could take a significant hit as retaliatory tariffs impact essential export sectors. Moreover, the European Central Bank (ECB) may find itself constrained in its ability to respond effectively. The ECB could be compelled to maintain lower interest rates or even reduce them further if escalating trade tensions continue to weigh on growth, a scenario that would further undermine the strength of the euro.
In summary, a Trump-led administration characterized by protectionist policies could place the euro in a precarious position. Analysts are bracing for potential shifts in both trade and monetary policy that would likely favour the dollar at the expense of the euro.
