MUFG: Dollar Increase if Trump Wins, With Limited Upside Potential Already Priced In
2min read MUFG anticipates that a Trump victory in the upcoming U.S. presidential election would trigger an initial rise in the U.S. dollar, fueled by expectations of inflationary tariffs and a potentially more aggressive trade stance. However, given the dollar's strength in recent weeks, much of this potential increase may already be priced in, suggesting only moderate upside in the event of a Trump win.
Initial Dollar Boost Expected on Election Outcome
If Trump were to secure the presidency, MUFG projects that the dollar would experience an immediate increase, driven by expectations of heightened trade protectionism. Trump’s comments have indicated a willingness to reintroduce tariffs more swiftly than in his previous term, which could lead to inflationary pressures within the U.S. economy. This policy outlook aligns with Trump’s prior stance on trade, which often involved using tariffs to protect U.S. industries, particularly manufacturing and energy, from foreign competition.
MUFG’s forecast is based on the assumption that such a policy approach would prompt capital inflows into the dollar as investors seek safe-haven assets amid potential trade tensions. However, the extent of these gains may be tempered by the dollar’s current valuation, as October already saw a notable rally.
Rise in USD Likely Priced In, Limiting Further Gains
MUFG analysts highlight that the dollar’s recent appreciation may have already captured a portion of the potential upside from a Trump victory. The dollar index has climbed steadily throughout October, reflecting investor expectations of a more hawkish stance from the Federal Reserve and concerns over global economic stability. With much of this positive sentiment factored into current levels, the scope for further gains could be limited.
In practical terms, MUFG expects the EUR/USD exchange rate to drop below 1.05, should Trump win. However, the analysts do not foresee the pair falling to parity, as the dollar’s strength is seen as nearing a short-term peak. This outlook implies that while a Trump win may support the dollar, the reaction could be muted compared to previous dollar rallies.
Inflationary Tariffs and Potential Market Reactions
The primary factor underlying MUFG’s forecast is Trump’s inclination to implement tariffs that could raise domestic inflation. These inflationary tariffs, aimed at curbing imports and boosting domestic production, may lead to higher consumer prices. In turn, this inflationary outlook could attract investors to the dollar as a relatively stable currency amid potential market disruptions.
However, the inflationary impact of such tariffs could also create challenges for the Federal Reserve. If inflation accelerates, the Fed may face pressure to adjust its interest rate policy, a move that could further impact the dollar’s trajectory. Investors will likely monitor any policy signals from the Fed closely, especially if tariffs lead to unexpected price increases in key sectors.
Outlook for Euro and Implications for Global Markets
A stronger dollar, especially if paired with inflationary tariffs, could create headwinds for the euro and other major currencies. MUFG’s forecast of EUR/USD slipping below 1.05 aligns with this view, as the European economy grapples with its own economic challenges, including slow growth and inflationary pressures. A weaker euro relative to the dollar could further complicate the European Central Bank’s monetary policy efforts as it seeks to stabilize the region’s economy.
Globally, a stronger dollar driven by trade tariffs could also impact emerging markets, particularly those with dollar-denominated debt. These markets could face increased borrowing costs, which may lead to tightened financial conditions and slower growth, adding a layer of complexity to the global economic outlook.
Conclusion
MUFG’s outlook suggests that a Trump victory would likely lead to an initial rise in the dollar, with inflationary tariffs anticipated as a key policy focus. However, the dollar’s recent gains may have already priced in much of this potential upside, implying only a limited increase following the election. With EUR/USD expected to drop but not reach parity, the reaction may be relatively muted, influenced by both Trump’s potential trade policies and the dollar’s current valuation.
As investors weigh the potential impacts of these scenarios, they will be closely watching any developments in U.S. trade policy, particularly around tariffs, as well as Federal Reserve responses to inflationary pressures. In this context, a strong dollar would have ripple effects across global markets, adding layers of complexity for investors navigating the post-election landscape.
