US election preview

On the FX reaction to a Trump vs Harris win

Harris:

This would undoubtedly be the lower uncertainty scenario of the two outcomes. We would largely see a continuation of the status quo on domestic and foreign policy, and Harris would push for an increase in taxes once Trump’s tax act expires in 2025.

We think that the prospect of higher taxes could be a mild bearish for the dollar, as investors brace for a weaker performance in the US economy, lower inflation and lower Fed rates than under Trump. Markets would also price in less protectionism and stronger global growth, particularly in Asia, which may also be negative for the greenback given its safe-haven status.

We think that emerging market currencies would receive a mild boost, notably those in Asia that are closely linked to the Chinese economy (KRW, THB and MYR in particular). European currencies would also likely rally amid the lower European security risk - Harris has pledged continued support for Ukraine and NATO allies. Market volatility would be lower given the avoidance of the erratic and unpredictable nature of Trump’s leadership.

Trump:

We think that Trump’s emphasis on a lower tax economy could lead to higher disposable incomes and greater consumer spending in the near-term. US growth may be initially stronger in light of the aforementioned tax plans, provided he is able to pass any bills through Congress. Higher consumer demand and a ballooning in the primary deficit would, however, likely lead to higher US inflation, which could ultimately be negative for growth in the medium-term. This could be exacerbated by his tariff plans, which would push up the value of imported goods. Trump has also planned to crack down on undocumented workers, and his proposals to deport between 15 to 20 million migrants would be particularly problematic for the agriculture sector.

On balance, we think that a Trump election win would be bullish for the US dollar. While the prospect of higher US inflation could have damaging ramifications for medium-term growth, we think that markets will primarily react by pricing in a higher terminal Federal Reserve interest rate. The increased risk of a US protectionism-induced slowdown in global growth could also lead to a worsening in risk appetite and increased safe-haven flows into the dollar, as would heightened geopolitical risks under the Trump administration.

Emerging market currencies would, we believe, sell-off across the board, led by those in Asia, as investors brace for higher US rates, greater protectionism, more erratic foreign policy and weaker growth in China. European currencies would trade lower, in our view, amid uncertainty over NATO, higher tariffs and reshoring. Without question, volatility in markets would be elevated relative to a Harris presidency.