Melania Trump watches as her husband, United States President-elect Donald Trump, speaks during a candlelight dinner at the National Building Museum in Washington, DC, on January 19, 2025, one day before his inauguration ceremony. (Photo by Jim WATSON / AFP)
With Donald Trump coming to power in the United States, what can we expect from the evolution of the greenback? According to Jean-Paul Pollin, the current attractiveness of the American currency could be limited in time.
Since the end of September 2024, the value of the dollar has gained 9% against a basket of currencies (the DXY index composed by the Fed). It also increased by 8 and 9% respectively against the euro and the pound sterling. Such a development is not exceptional, but many analysts believe that it could continue in the coming months and this could have many consequences. To judge from this point of view, we must first identify the factors underlying the observed rebound, before wondering about their future in the short/medium term.
The currency of a “new golden age”?
Obviously the rebound of the dollar in recent months reflects the forecasts, followed by the result, of the presidential election. The market showed its confidence in the program of the elected candidate. More precisely, he expressed his approval for the protection of certain sensitive sectors by taxing imports (especially from China); for the consolidation of monopolies in other strategic sectors; for the limitation of environmental or prudential regulations in still others… All this has been interpreted as a set of provisions capable of strengthening the American economy, reducing its debts and external deficits, therefore consolidating the dominant position of its currency.
Added to this is the fact that US interest rates are significantly higher than those of other advanced countries, with the notable exception of the United Kingdom: ten-year rates are more than 100 bp higher than those of countries Europeans. This is explained by the fact that inflation, fueled by a robust economy and tensions on the labor markets, has not yet returned to the Fed’s objective: the latest statistics on sub-par inflation underlying puts it at 3.2%. In the short term, this situation improves the attractiveness of the dollar.
-Beyond the promises
But it is not certain that faith in this fantasized scenario is very lasting. Various observers have already argued that the sharp increase in import taxation will inevitably have an inflationary impact, even if it is offset by a reduction in taxes on businesses, the way in which it will be financed is unclear. The removal of immigrant workers should have a similar effect. Therefore, if it is true that the rise in prices played a major role in the defeat of the Democrats, the victory of the Republicans risks being a source of great disappointment. This is perhaps why recent statements, coming from the team ready to take power, have suggested that the increase in import taxes will be done gradually, therefore initially far from stratospheric rates. which were previously announced.
In these conditions the Fed should maintain or tighten its restrictive policy, negatively affecting investments and particularly in real estate which is struggling to recover from years of crises with mortgage rates still rising (around 7% for 30-year fixed rate bonds). ). The future Secretary of State for the Treasury has just dispelled any fears that might have been about calling into question the independence of the central bank to force it to relax its policy. But its compatibility with other aspects of the new economic policy remains questionable.
Finally and above all, the realization of Trumpist protectionism should have a significant negative effect on the economy of many countries: China but also the European “allies”. This will come because of the restructuring of world trade and its rules, but also because for countries importing raw materials (energy in particular) a continued rise in the dollar would have an inflationary and depressive effect, to the extent that the prices of these goods are denominated in this currency. It is very clear that for Donald Trump this is a phenomenon that does not fall within the scope of his concerns. But this could perhaps lead the countries concerned to put aside their dissensions and their inaction to respond to the “singularities” of the new American policy. This would change a lot of things, notably the future trajectory of the dollar, which is currently very difficult to guess.
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