The USD has rallied against almost every currency overnight as Donald Trump has won the US election with a big overperformance versus the polls.
Expectations leading into the vote were that this was going to be one of the closest run races in living memory. However, as was the case in both 2016 and 2020, both the opinion surveys and prediction models once again grossly underestimated Republican support, with Trump not only achieving a big victory in the electoral college, but an outright win in the popular vote.
The dollar started to strengthen overnight as early results showed Trump was performing well in the key battleground states. This continued as Trump wins in key swing states started to be projected and later declared (North Carolina, Wisconsin, Pennsylvania and Georgia). Indeed, it now looks likely he will take victory in all seven key swing states.
Generally, markets are taking the view that another spell in the White House for Donald Trump is a bullish development for the USD. Some of key beliefs for this are as below:
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Trump’s preference for lower US tax rates. Proposals for sweeping tax cuts under President Trump are seen as lifting near-term US growth, which may lead to higher inflation and therefore higher US interest rates (which makes the USD more attractive to investors seeking higher yields).
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Greater protectionism means higher US tariffs, particularly on China and Europe. The implication here is that these tariffs could be a precursor to weaker global growth under Donald Trump. This is a scenario that would see investors potentially favour safe-haven assets, such as the USD.
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Another Trump term may ensure higher geopolitical uncertainty, which is also not favourable for risk appetite. Support for Ukraine is not guaranteed, nor does Trump hold a particularly favourable view towards NATO.
As a result, the Euro was the worst performer against the USD among the major currencies, as investors brace for potentially onerous European tariffs and a heightened security risk. The EUR/USD has lost around 2-cents overnight and hit a 4-mth low. Sterling has proved to be more resilient against the USD, in part due to its lower exposure to global demand, but the GBP/USD is still down around 1.3% from the high it reached overnight and now trades at a 6-day low. The GBP/EUR is up 0.5% today and trading at a 1-week high.
So far, the moves in the FX market have been relatively contained versus many expectations. However, it’s very early days and we would expect volatility to remain elevated over the coming trading sessions, as investors position themselves in anticipation of another Trump presidency. This could potentially mean fresh downside in risk assets and another bout of USD strength, particularly should the Federal Reserve hint to markets at upcoming policy meetings (possibly even at tomorrow’s) that the outcome of the election may slow the pace of their interest rate cutting cycle.
In terms of actual US government policy change, we will have to wait until 20th January 2025 for Trump’s inauguration. However, Trump’s rhetoric in the meantime will be closely watched by market participants and any commentary that doubles down on his tariff threats and tax cuts may cause a further flight to safety (e.g. USD).
