Investors are betting that Donald Trump will boost the dollar
Subscribe to enjoy similar stories. Political risk—the notion that an election might have a meaningful impact on financial markets—used to be something that was the concern of emerging-market investors. Those in rich countries paid attention to central bankers, rather than politicians.
Things are a little different today. In the run-up to America’s presidential election on November 5th, asset prices have moved alongside polling averages. Wall Street hums with talk of the “Trump trade".
The trade is based on the idea that a second Trump administration would be positive for American stocks, bad-but-not-terrible for Treasuries and great for the dollar. Equity returns would be boosted by corporate-tax cuts and deregulation. These very same tax cuts would increase government borrowing, lowering bond prices and lifting yields—but not by enough to destabilise the economy and hit stockmarket returns.
All of this would lift the dollar, which has generally moved in line with the interest rate available on American ten-year bonds in recent years (see chart). It might seem strange that the prospect of fiscal deterioration and faster price rises would be positive for America’s currency. In general, currencies lose value when public finances worsen and inflation climbs.
But the dollar plays a unique role in the global financial system as the ultimate source of liquid safe assets. Higher yields on Treasuries, even when the product of fiscal profligacy, tend to make holding dollars more attractive. Those who have bought into the Trump trade expect such a dynamic to continue.
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