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The potential “Trump Effect” on financial markets is drawing attention as former President Donald Trump’s candidacy as the Republican nominee for president has gained momentum after the Iowa Caucus. According to predictions, depending on the direction of policy, if he is elected, there may be a recurrence of the rise in U.S. Treasury yields (a fall in Treasury prices) and a strong dollar.
According to Bloomberg on the 21st (local time), Goldman Sachs’ Global Market Research Group recently stated in a client memo that “The likelihood of Republicans taking both the White House and Congress is high,” and “In this case, the Federal Reserve (Fed) may raise the benchmark interest rate due to the possibility of economic overheating, leading to a rise in long-term Treasury yields.” Experts predict that if Trump is re-elected, he will push for economic stimulus measures such as expansionary fiscal policy and tax cuts. This could increase concerns about inflation and increase the issuance of Treasury bonds, resulting in higher Treasury yields and a fall in Treasury prices.
When U.S. Treasury yields rise, the dollar’s value typically increases. In particular, Trump’s strengthening of import tariffs to protect American industries will also be a factor in a strong dollar. Reducing imports leads to a drop in the outflow of dollars, which in turn lowers the availability of dollars abroad and eventually slows the growth rate of U.S. exporting nations. “The Trump effect will negatively affect the euro, yuan, Mexican peso, etc., so it will lead to a rise in the dollar’s value,” according to Deutsche Bank strategist Allan Ruskin’s analysis. The peso, which had rebounded last year, dropped by about 2% after Trump’s victory in the Iowa Caucus. As the U.S. election draws near and the possibility of Trump’s winning increases, the yuan may come under more pressure as well.
On the other hand, there have been observations that Trump would deliberately pursue a weak dollar to protect domestic industries. Consumer preference for American goods over imports may increase if the dollar’s value falls and import prices rise in the U.S. The Financial Times (FT) stated, “Trump may try to impose a 10% tariff on all imports, but he will face fierce resistance at home and abroad. Since a weak dollar is an easier way to boost domestic manufacturing, he may focus more on exchange rates rather than tariffs.
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