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How U.S. Election Outcomes Influence Global Currency Trends

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Published Date: 02 Dec 2024Updated Date: 30 Dec 20246 mins readBy MOFSL

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Donald Trump has been elected 47th President of the United States and it's both good and bad news for India. Good news, because Trump has pledged to reintroduce tariffs on China. This will incentivise more businesses to move their manufacturing operations from China to India.

And for bad news, Trump’s policies pose challenges for India’s IT sector. Trump can extend similar tariff measures to U.S. companies that heavily rely on Indian IT professionals.

During Trump’s first term- strict rules on H-1B visas led to a surge in rejection rates for both H-1B and L-1 visa applications. It affected Indian IT service providers that were heavily dependent on these visas to deploy skilled workers to the U.S.

There are many changes that Donald Trump will bring about. Most of these changes will affect countries across the world as policies affect internal interest rates which further help to decide the exchange rate.

Let’s look at the impact of U.S. election results on global currencies and trade:

Policy Changes

Donald Trump has pledged to "end inflation and make America affordable again," but analysts are cautious about the outcomes of his proposed trade tariffs.

Here’s an overview of trends across economic policy areas:

● Fiscal Policy

Trump and his Republican party has advocated for tax cuts and reduced government spending. This can lead to narrow budget deficits that will boost the strength of the U.S. dollar.

● Monetary Policy

The federal reserve operates independently but the economic policies of a republican administration can still influence monetary trends. Accounting for history, republican policies have leaned toward tighter monetary policies, which once again leads to higher interest rates and a stronger USD.

● Trade Policy

A republican government can adopt confrontational trade policies which will lead to global trade tensions. These policies will further reinforce the USD’s status as a safe-haven currency.

● Regulation

Reduced regulation in sectors like finance and energy spur short-term economic growth and improve USD’s value.

● Tax Policy

The Republican party can reduce corporate tax rates which could promote U.S. economic expansion. This will once again create a higher value for the USD.

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Impact on Major Currency Pairs

The Republican party’s policies can affect the major currency pairs as follows:

EUR/USD

The Euro can initially decline as the U.S. dollar (USD) gains strength because of U.S. pro-growth policies. The extent of the Euro's decline will depend on their economic performance and the monetary policy stance of the European Central Bank.

GBP/USD

The British Pound could come under pressure against the USD. If the U.S. adopts confrontational trade measures, uncertainty surrounding UK-U.S. trade relations can further weigh on Sterling.

USD/JPY

The Japanese Yen may weaken if Republican policies are seen as fostering global economic growth. If these policies exacerbate global trade tensions, the Yen’s status as a safe-haven currency can lead to its appreciation.

USD/CAD

The Canadian Dollar could lose value against the USD, especially if Republican trade policies negatively impact trade between the U.S. and Canada. Fluctuations in oil prices and energy-related policies would influence the CAD’s performance.

Emerging Market Currencies

Emerging market currencies could face downward pressure due to tax-imposing trade policies and higher U.S. interest rates. These factors can make riskier assets less appealing and can weaken the currencies of emerging markets against the USD.

Impact on Indian Markets

Fewer Investments from Abroad: Higher U.S. interest rates can reduce foreign investments in India. This may affect the stock markets and make it harder for the RBI to manage inflation and growth.
Challenges for Exports: Higher tariffs and strict immigration policies can hurt industries like the IT and pharma industries. This will reduce the demand for Indian services and goods in the U.S.
New Opportunities: As companies move away from China, Indian companies can benefit by attracting manufacturing and investments in sectors like tech, defense, and pharma.
Geopolitical Changes: Resolving global conflicts can reduce uncertainty in international markets and benefit India’s economy and investor confidence. However, India no longer has a neutral stance in geopolitics and can emerge as a super-power itself and this can affect business relations with other countries.

Conclusion

Trump’s return to power brings a mixture of challenges as well as advantages. Hence it's better to maintain caution if your business or passive income depends on currencies as the Trump Government doesn't work in a very predictable manner.