Republican Resurgence: Trump’s Second Term and Economic Implications
The Republican Party has successfully reclaimed control of the Senate and has a leading position in the House of Representatives, resulting in a decisive “red sweep” scenario. This political shift provides former President Donald Trump with considerable latitude to advance his policy agenda. Following his victory, which marks his second term after his presidency from 2016 to 2020, Trump is anticipated to persist with his strategy of maintaining low taxes for corporations and affluent individuals, while also advocating for increased tariffs on foreign imports.
In his inaugural speech following the election results, Trump declared, “We are going to fix our borders,” emphasizing that “America has given a powerful, unprecedented mandate.” Economists largely concur that Trump’s trade policies, in conjunction with tax reductions and a stringent immigration stance, are likely to elevate consumer prices. This inflationary pressure may compel the Federal Reserve to implement a more restrictive monetary policy, thereby bolstering the dollar’s strength.
Dollar Strengthens While Euro Faces Significant Decline
As of 8 am CET, the euro plummeted by 1.75% to $1.0740, positioning it for its most significant daily decline since the onset of the COVID-19 pandemic in March 2020. The dollar index, which tracks the greenback’s performance against a basket of major currencies, surged by 1.5%. Concurrently, other currencies weakened against the dollar: the Japanese yen fell by 1.5%, the Australian dollar decreased by 1.4%, and the British pound dropped by 1.3%.
In Central-Eastern Europe, the Hungarian forint experienced a decline of 2.4%, the Czech koruna fell by 2%, and the Polish zloty decreased by 1.9%. Additionally, the Chinese yuan and the Mexican peso also faced downward pressure, declining by 1.2% and over 3%, respectively, largely due to expectations surrounding stricter trade and immigration policies. Francesco Pesole, a forex analyst at ING Group, noted, “The reaction in FX markets has been a strong dollar across the board. We expect a prolonged period of dollar outperformance.”
Potential Challenges for the Dollar Amid Political Pressures
However, Otavio Costa, a macro strategist at Crescat Capital, cautioned that Trump’s potential influence on the Federal Reserve to lower interest rates could counteract the dollar’s rally. Costa remarked, “With a Fed that’s compelled to cut rates despite clear signs of bottoming inflation, this is one of the most challenging environments for the USD that I have seen in my career.”
In the bond market, US Treasury yields surged overnight, with the 10-year benchmark yield climbing by 15 basis points to 4.42%. This movement widened the spread between the 10-year Treasury and the German Bund to 200 basis points—the largest gap seen in six months. The strengthening dollar and rising U.S. yields have exerted downward pressure on commodities. Futures for West Texas Intermediate (WTI) crude oil fell by 1.5%, settling just below $71 per barrel, while Brent crude experienced a similar decline to $74.40. Additionally, gold prices edged down by 0.7%, with both silver and copper sliding by 2.4%.
Global Stock Market Reactions: U.S. Gains and China’s Declines
Trump’s electoral victory has fueled optimism in U.S. equity futures, with S&P 500 futures rising by 2%, indicating the possibility of a record-setting market opening. Investors seem hopeful for relief from the corporate tax increases previously proposed by Vice President Kamala Harris, while downplaying potential global growth concerns resulting from higher U.S. tariffs.
In Asia, Japan’s Nikkei 225 index soared over 3.4%, contrasting sharply with declines in Hong Kong’s Hang Seng and the Shanghai Composite Index, which fell by 2.5% and 1.1%, respectively. These declines reflect apprehensions regarding potential trade restrictions on China. In Europe, Russian stocks emerged as notable performers, with the MOEX index gaining 2.5% amid speculation that Trump’s administration may relax economic sanctions imposed on Russia.
European markets commenced trading mostly in the green. The broader Euro STOXX 50 index rose by 0.5%, with the Dutch AEX index up by 0.8%, France’s CAC 40 increasing by 0.6%, Germany’s DAX rising by 0.5%, and Italy’s FTSE MIB gaining 0.3%. However, Spain’s IBEX 35 was an exception, slipping by 0.7%. European financial stocks led the upward momentum, with Unicredit, Deutsche Bank, Societe Generale, AXA, and BNP Paribas all advancing at the opening bell.
