Is The Donald A Dollar Risk?

The U.S. dollar will weaken sharply if Donald Trump wins the presidential election in November, according to Bloomberg's Mark Cudmore. But it’s less clear if the sell-off has legs beyond his potential inauguration in January.

Given some of the pronouncements made during his campaign to date, markets will rightly be concerned about the direction of Trump’s policy. But, without taking a view on whether he actually intends to preside as indicated, the reality is that he’ll be severely constrained in his ability to dictate policy.

Recent polls show that a Trump victory isn’t the base case. But, with three months until the election, its worth evaluating what could be the initial impact of a Trump victory.

There’s a valid risk that the credibility of the greenback as the world’s reserve currency may be undermined amid fears that Trump may rip-up or ignore previous treaties and trade agreements.

[And perhaps that explains both the rise in gold – hence drop in USD – and steeping of the gold forward curve, since Trump's poll number have risen from his trough in June]

He’s known to be a fan of leverage and would happily borrow money on a major scale to fund spending. For a country with already massive debts, this may be perceived as a de facto plan to monetize its debt and will be currency negative as a result.

Trump has consistently stated that he favors low interest rates, specifically for the purposes of weakening the dollar and making it cheap to service the U.S. debt pile.

No matter how grand his fiscal plans and enthusiasm to take on debt, there’s actually little he’ll be able to accomplish on that without the backing of Congress. In a best case for Republicans, that means upper and lower house majorities dependent on debt-averse Tea Party lawmakers. Or he may need to deal with the Democrats.

And as for pressuring rate policy? The Fed operates independently and Janet Yellen’s term is not up until 2018 so he’ll have minimal influence over the medium term.

So some of the dominant fears that could prompt a short-term slump in the dollar may be misguided. And many other factors will come in to the mix next year.

In fact, Trump’s mooted plan to enact a tax amnesty for the repatriation of U.S. corporate profits would have more chance of getting through a Republican house and would be a massive USD positive.

A majority vote for Trump will whack the dollar in to year- end, but the longer-term currency path under his presidency? As unknowable as his policy details.

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