Will Kamala Harris Weaken the US Dollar?

According to a recent note from investment bank Macquarie, the so-called “Trump trade,” a series of investments that would have paid off if he had been re-elected, has begun to fall apart.

One of the most prominent such trades is a bet on a stronger US dollar. But as of Wednesday, the dollar DX-Y Index (which measures the dollar against a basket of other currencies) is hovering around its 2024 low. The dollar has fallen less than 3% so far in August.

Macquarie said that now, with the possibility of Vice President Kamala Harris winning increasingly high, the dollar is likely to weaken further.

“We believe this weakness is partly due to the cancellation of the ‘Trump deal’, which was built on the premise of higher inflation and higher interest rates in the US, which would be supportive for the USD,” said Thierry Wizman, FX and Rates Strategist at Macquarie Global. Luck.

Macquarie has been convinced that the dollar is weaker than it should be. There are some positive signs for the dollar, including a series of declines in Asian stock markets and interest rate cuts by the central banks of Britain and the eurozone. But none of these are bullish for the dollar’s ​​relative value.

“In our view, the weakness in the US dollar since early August is a bit odd as it comes during a period when US data (retail sales, initial jobless claims, ISM services) has pointed to renewed relative strength in the US, following recession fears in late July and early August,” Wizman wrote.

‘Kamala-mentum’

The explanation, Wizman and his team concluded, is that investors decided to stay away from “Trump trades” because they thought the candidate making them probably wouldn’t win. Wizman points to the fact that many Trump trades began to fall the week after President Joe Biden announced that he would not seek the Democratic nomination. A few weeks later, in early August, when the first polls showing Harris overtaking Trump were released, the DXY fell. That, Wizman said, is more circumstantial evidence that Trump trades are indeed falling.

The momentum of Harris’ campaign, which Macquarie calls “Kamala-mentum,” will continue to weaken the dollar as the Fed cuts interest rates, Macquarie said. With the Democratic National Convention in full swing, a post-convention rebound in polls for Harris could even accelerate the dollar’s decline, Macquarie said.

The retreat from the Trump deal seems to indicate that at least some investors are losing faith in Trump’s chances in November. But with the election months away, any outcome is far from a foregone conclusion, especially in a race like this year’s that has been so upset recently, according to Frank Kelly, senior political strategist at investment firm DWS. “July was Trump’s month, August was Harris’s month, and September is going to be a full-blown brawl,” he said.

Uncertainty as much as anything is contributing to the retreat from Trump deals. Latest News poll show two candidates in one to two percentage points apart. Before Harris took a recent lead in some polls, Trump was far ahead Biden’s, it seems, on the way to victoryNo longer able to bet on certainties, investors adjusted.

Trump’s victory could force the Fed to support the dollar

Investors have so far associated Trump with a stronger US dollar because they believe his priorities of comprehensive tariffs, drastic immigration restrictions and tax cuts will cause inflation and that will force the Fed to keep interest rates higher – which will increase the relative value of the US dollar in international currency markets.

“In our view, Trump is arguably better—fundamentally—for a stronger US dollar than a Democratic administration,” Wizman wrote. “That’s because Trump’s core policies—tax cuts, immigration restrictions, tariffs—will be seen as more inflationary, thus keeping policy rates higher than other policies.”

Ironically, Trump himself is not a fan of a strong dollar. Trump has previously argued that the dollar is too strong, making it too expensive for foreign buyers to buy US goods. “We have a major currency problem,” Trump said. speak Bloomberg in July.

‘Now they will start attacking each other on policy issues’

Still, most investors and economists expect Trump’s policies to do the opposite. “The market’s perception—and ours—is that Trump’s policies should be tied to higher policy rates than Harris’s,” Wizman wrote in his note.

Harris has been vague on policy in the early days of the campaign, but she has begun to lay out more of her policies over the past week. So far, her economic stance has included supporting regulations against price gouging on consumer goods, building more housing, and eliminating the tip tax (an idea first floated by Trump).

The Harris campaign has hinted that that will change in the coming weeks. The Democratic National Convention, which is underway, could serve as a starting point for a broader policy rollout. Kelly, the political strategist, said that once that happens, the campaign will move into the next phase. “Now they’re going to start attacking each other on policy issues instead of on personalities,” he said.