The US dollar’s future could be drastically influenced by the outcome of the upcoming 2024 presidential election, according to analysts at JPMorgan Chase & Co. Their report, released last week, outlines two starkly different scenarios, each with the potential to significantly impact the greenback’s value.
Trump’s Return: A Dollar Boost?
If Donald Trump returns to the White House, JPMorgan predicts a surge in the dollar’s value driven by his aggressive trade policies. Trump has already threatened to increase tariffs on Chinese imports to a staggering 60%, alongside a proposed 10% tariff on all US imports. This return to his protectionist trade stance could lead to a tariff-heavy approach, which, according to JPMorgan’s estimates, would significantly strengthen the dollar.
The report cites historical precedent, highlighting the dollar’s benefit from a similar combination of fiscal stimulus and tariffs in 2018-2019. In a scenario where Republicans sweep the election, the trade-weighted dollar index (tracked by the Invesco DB USD Index Bullish Fund ETF UUP) is projected to rise by 7.3%. This could see the dollar experience its most significant gains against the Swedish krona (SEK) at 10.8% and the euro (EUR) at 8.4%.
Harris Victory, Divided Congress: A Weaker Dollar?
Conversely, if Kamala Harris wins with a divided Congress, JPMorgan expects the dollar to weaken considerably, with the trade-weighted dollar index potentially dropping by 5.4%. This outcome would likely see a weaker dollar as trade tensions ease and economic priorities shift.
The Impact of Tariffs on the Dollar:
JPMorgan’s economists estimate that the tariffs imposed during Trump’s first term led to a 0.3% rise in inflation and a 0.4% decrease in GDP growth. However, they warn that a second Trump administration could trigger even greater economic disruptions if tariffs are escalated further.
The report states that a 60% tariff on all Chinese imports could increase US consumer prices by 1.1%, while a universal 10% tariff on all imports might push inflation up by as much as 1.5%. In a worst-case scenario, combining both a 60% tariff on Chinese goods and a 10% universal tariff, inflation could surge by 2.4%, placing immense pressure on American consumers and businesses.
This inflationary surge could force the Federal Reserve to adopt a more hawkish stance, reversing any plans to ease monetary policy. Higher interest rates would be necessary to counteract the inflationary impact of tariffs, which could create a wider gap in monetary policy between the US and other economies. This scenario would benefit the dollar as higher interest rates make US assets, like Treasuries, more attractive to foreign investors due to their higher yields. This increased demand for US assets would boost demand for dollars, further strengthening the greenback in the face of escalating trade tensions.
The 2024 US election is shaping up to be a defining moment for the dollar’s trajectory, and the choices made by voters will have significant implications for global markets.
