A Trump Win Could Sink the Dollar
By Andrea Wong Anooja Debnath
The dollar’s surge after the Federal Bureau of Investigation absolved Hillary Clinton of committing a crime sent the greenback close to the levels likely to prevail if she won the presidential election.
The U.S. currency rose as much as 1.5 percent versus the yen after the FBI said it’s sticking by the conclusions of the original probe back in July. That took the dollar to within 0.6 percent of the 105.25-yen level that the top 10 currency forecasters see it reaching within 24 hours of a Clinton victory. A majority said the dollar would tumble through 100 yen if Donald Trump won.
“Our base case is that Clinton wins and the dollar strengthens” into the Federal Reserve meeting in December, said Robert Rennie, head of financial-markets strategy in Sydney at Westpac Banking Corp., the fifth-most accurate major currency forecaster in Bloomberg’s latest rankings. He sees the dollar at 105 should Clinton win. “Clearly, markets appear to have embraced that view today.”
Monday’s reaction echoes some of the fluctuations in the run-up to June’s Brexit vote, when global currency volatility spiked toward a four-year high. Democrat Clinton’s lead over Trump had been narrowing before the FBI announcement, polls show, which has raised the stakes in global markets because the Republican candidate promised to tear up existing U.S. trade agreements and is seen as less predictable by investors.
“Currency markets are long the dollar and not positioned for a Trump victory, so there may be panic selling of dollar and buying of safe-haven currencies,” said Scott Petruska, a Newton, Massachusetts-based senior adviser at SVB Financial Group, the sixth most-accurate currency forecaster.
He sees the dollar falling to 99.50 yen 24 hours after a Trump victory, while the greenback would rally to 105.25 if Clinton won.
The dollar gained 1.3 percent at 104.46 yen as of 5 p.m. in New York, after touching 104.63. It advanced 0.9 percent to $1.1041 per euro. The Mexican peso, which tends to strengthen when Trump’s campaign has a setback, climbed 2.3 percent in the biggest gain among major currencies.
The Bloomberg Dollar Spot Index, which measures the U.S. currency against a basket of 10 major counterparts, rose 0.4 percent, following a six-day, 1.4 percent decline.
Bloomberg asked the 10 most-accurate currency forecasters from its latest quarterly rankings to predict where the dollar would trade against the yen and euro 24 hours and seven days after the election. Among the top 10, only Wells Fargo & Co. declined to provide election-based forecasts.
The one-day reaction to a Trump win would weaken the dollar to $1.1328 per euro, down about 2 percent from current levels, while a Clinton victory would see the greenback gain to $1.1006, according to the average of nine estimates.
The seven-day results suggest a Trump win would weaken the dollar to 99.06 yen and $1.1389 per euro. A Clinton triumph would boost the greenback to 104.78 yen and $1.1014 per euro.
In terms of the immediate market reaction, a win for the Democratic nominee would lead investors to pivot their focus back to the economy and monetary policy, said David Kohl, the Frankfurt-based head of foreign-exchange research at Julius Baer Group Ltd., the No. 1 forecaster in the survey. High on the list would be the the Dec. 13-14 Fed meeting, for which futures traders are currently pricing in a 82 percent chance of an interest-rate increase.
There will likely be “no reaction on a short-term horizon,” Kohl said. “Over the longer term, focus will shift much faster to the Fed. Under Clinton, politics will not be an issue for financial markets for a long time.”
If Trump wins, dollar bulls may still come out on top if they can stomach short-term losses.
While all analysts predict the dollar would suffer in the immediate aftermath of a Trump win, Julius Baer and second-placed Rand Merchant Bank said the U.S. currency would rally in the long run because the Republican’s policies, including pledges to cut taxes and spend as much as $500 billion on infrastructure programs, are inflationary. That would lead to higher U.S. rates and bolster the dollar’s allure.
To them, the crux of forecasting lies in pinpointing how long it’ll take for investor angst to dissipate, and figuring out when the $5.1 trillion-per-day global currency market starts pricing in Trump’s economic agenda.
“Forecasts are always difficult -- you’re basically trapped between fundamentals and momentum,” Kohl said. “We have a call out and I stand quite firmly behind it -- that the dollar would actually profit from a Trump victory, but this will not play out in 24 hours and also not in a week.”
Kohl predicts the dollar would gain to 115 yen, and $1.04 against the euro, by June 2017 if Trump becomes president. If Clinton’s elected, he said the dollar would appreciate to 111 yen and $1.07 versus the single currency.
Trump’s plan to lure American multinationals such as Apple Inc. and Microsoft Corp. to bring billions of offshore cash home would ultimately drive demand for the dollar, said Rand Merchant Bank’s John Cairns. The candidate’s promise to expand fiscal policy through tax cuts will boost economic growth and potentially lead to higher interest rates, according to the Johannesburg-based strategist.
“The dollar should logically strengthen on a Trump victory,” Cairns said. “He’s more likely to approve a tax holiday, which would see significant capital return to the U.S.”