(Bloomberg) -- A second Donald Trump presidency would boost the dollar despite the Republican’s recent comments that he’d prefer a weaker US currency, according to Wall Street strategists.
Deutsche Bank AG argued in a note Monday that it would be “very difficult” to engineer a softer greenback, as it would cost trillions of dollars in intervention or policies aimed at encouraging vast US capital outflows. Morgan Stanley maintained that Trump’s proposed policies would push the dollar up, while Barclays Plc recommended that clients use the recent weakness to re-enter long trades.
The strategists’ calls follow Trump’s recent remarks about how the greenback’s strength has been hurting American competitiveness, a stance he long held during his first term as president. His comments, which also pointed to the weakness of yen and yuan, weighed on the dollar, which is down 1.6% since reaching an eight-month high in late June.
“Tariffs and their associated stronger implications for the dollar are significantly more likely to be the dominant market outcome than policies to pursue a weaker dollar,” Deutsche Bank strategists wrote in a note.
A gauge of the dollar’s strength fell on Monday as traders weighed the impact of Joe Biden’s decision to drop out of the presidential race. But the index is still up more than 3% this year and Barclays says other long-term drivers, such as weakening global growth, will keep buoying the US currency.
“Even on its own, the tariff risk is enough to argue for a dollar rally,” Barclays strategists including Themistoklis Fiotakis wrote in a note. “Even if fully retaliated, tariffs of the magnitude discussed by the Trump team would likely boost the dollar by up to 4% against currencies like the Chinese yuan.”
Morgan Stanley’s strategist James Lord said the debate around the dollar’s outlook picked up after Trump’s recent comments on the currency weakness, but he is sticking to the view that tariffs will result in a stronger greenback. That’s especially true if retaliation from trading partners raises risks for the global economy.
“It is difficult for FX intervention to sustainably alter the trajectory of exchange rates,” Lord wrote in a note on Monday. “We believe investors generally share our view that the dollar would likely rise in response to trade tariffs being implemented, though these are far from uniform.”
While Trump could also try to weaken the dollar by curbing the Federal Reserve’s independence, governmental checks and balances would make this route highly challenging given the dollar’s unique status.
“Although eroding the Fed’s credibility would be a good place to start, any US administration faces a tougher job devaluing its currency compared to what other governments can do,” according to Dario Perkins, managing director at TS Lombard. “The USD is the world’s reserve currency, and this creates a structural dollar bid.”
(Updates with Morgan Stanley’s comments from paragraph two.)
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