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JPMorgan Chase & Co. Analysts indicate that the fate of the US dollar could change dramatically depending on the outcome of the upcoming presidential election.
A victory for Donald Trump, which gives Republicans full control of Congress, could boost the dollar by as much as 7.3%, while a victory for Kamala Harris with a divided Congress, this could lead to a decline of more than 5% in the dollar’s trade-weighted index (TWI), according to a report released last week.
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If Donald Trump returns to the White House, JPMorgan predicts a series of aggressive trade policies that could propel the dollar.
In particular, Trump has already threatened to increase tariffs on Chinese imports to 60% and raised the possibility of imposing a 10% tariff on all US imports.
The return of Trump’s protectionist trade policies would likely lead to a heavy tariff approach that could significantly strengthen the dollar, according to JPMorgan estimates.
“There is precedent for what the combination of fiscal stimulus and tariffs can do to the currency; it is well known that the dollar has benefited from both channels during 2018-2019,” JPMorgan wrote.
In a Republican sweep scenario, the dollar is expected to rise significantly, with the trade-weighted dollar index followed by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP) – expected to gain 7.3%. In this case, the dollar could see its strongest gains against the Swedish krona (SEK), which rose 10.8%, and the euro (EUR), with an expected rise of 8.4%.
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Conversely, JPMorgan expects that if Harris wins with a divided Congress, the dollar will suffer the steepest decline, with the trade-weighted dollar index possibly falling 5.4%. This outcome would likely lead to a weaker dollar as trade tensions ease and economic priorities shift.
The table below highlights JPMorgan’s expected currency movements for the next one to two quarters under various election outcomes, giving forex traders insight into how the 2024 US election could shape the dollar’s trajectory.
Economists at JPMorgan, the world’s largest investment bank, estimate that the tariffs imposed during Trump’s first term increased inflation by about 0.3% and shaved 0.4% off GDP growth.
However, JPMorgan analysts warn that a second Trump administration could cause even greater economic disruptions if rates are raised further.
“In the event of a Trump 2.0 administration, the impact of a tariff war 2.0 could be much greater,” the JPMorgan team said.
They predict that a 60% tariff on all Chinese imports would increase U.S. consumer prices by 1.1%, while a 10% universal tariff on all imports could boost inflation by as much as 1.5%.
In a worst-case scenario – in which both a 60% tariff on Chinese goods and a 10% universal tariff are imposed – inflation could rise by 2.4%, putting significant pressure on US consumers and businesses.
This wave of inflation would likely force the Federal Reserve to return to a more hawkish stance, undoing any plans to ease monetary policy.
Higher interest rates would be needed to counter the inflationary effect of tariffs, which could cause a sharper divergence in monetary policy between the US and other economies.
This scenario would be a tailwind for the dollar. Rising interest rates make U.S. assets, such as government bonds, more attractive to foreign investors because of their higher yields. This increased demand for US assets, driven by yield differentials, would boost demand for dollars, further strengthening the dollar in the face of escalating trade tensions.
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This article If Trump and Republicans battle it out, the dollar could rise 7% – but Harris’ win could see a 5% drop, JPMorgan says originally appeared on Benzinga.com
