Dollar upbeat ahead of Trump’s White House return

November 7, 2024, 3:54 PM

Former President Donald Trump has secured a second term, and the dollar is up 4.5 percent on September

Trump win extends dollar rally
GCC states peg to the dollar
Strong dollar helps investment

Donald Trump’s US presidential election victory has extended a dollar rally that began in late September on expectations that the real estate mogul’s return to the White House may ultimately force the Federal Reserve to resume interest rate rises.

Five of the six GCC countries peg their currencies to the dollar, while the sixth – Kuwait – pegs its dinar to a basket of currencies in which the dollar is believed to have a majority weighting.

The dollar index, which tracks the greenback against a basket of six other major currencies, surged to a four-month high of 105.4 in early Wednesday trade as it became clear that Trump would prevail against Democratic candidate Kamala Harris in the US vote.

The index eased subsequently to 104.9 on Thursday, but remains up 4.5 percent since September 24. Such a percentage change is large in foreign exchange trading.

“In the short and medium term, Trump’s victory is positive for the dollar because one of the key distinctions between his campaign and Harris’s was his emphasis on economic policies and having a coherent economic plan,” Omar Al-Ubaydli, president of the Bahraini Economists Society in Manama, said.

“The sense among the electorate was that Trump possessed an economic plan, whereas Harris did not. Also, Biden’s economic policies in the last year have not been particularly noteworthy, and Harris is perceived as an extension of Biden.

“So, consequently, confidence in economic policies is higher with Trump being in charge and will contribute to the strength of the dollar in the short and medium term.

“However, in the long term, Trump’s capriciousness in terms of imposing international sanctions could impact the value of the dollar negatively.”

One-third of the world’s population live under US sanctions, the Washington Post estimates. The imposition of such punitive measures soared during Trump’s first stint as president, pushing states such as Iran and Russia and countries trading with them to use the dollar less.

Nevertheless, the dollar’s further gains this week represents an acceleration of the so-called “Trump Trade” – the 78-year-old has pledged specifically to impose tariffs on Mexico and China, the United States’ top two importers, as well as a 10 percent tariff on imports from all countries.

It is likely these would increase inflation, as would his various proposed tax cuts, and so could push the US Federal Reserve to raise interest rates, currency traders believe.

The dollar weakened steadily from mid June to late September as markets bet the Fed would begin long-foretold rate cuts. It did so on September 19, trimming the benchmark rate by 50 basis points to 5.0 percent in mid-September, its first cut since late 2018.

Higher interest rates would make the dollar a more attractive investment, spurring the dollar rally.

Gulf dollar pegs

The Gulf’s various dollar pegs endure for three key reasons, said Al-Ubaydli: to maintain low inflation, for the ease of selling oil and gas, which are priced in dollars, and to help attract foreign direct investment.

A dollar peg removes the foreign exchange uncertainties that affect other emerging market currencies.

“The Gulf’s desire to attract foreign direct investment is even more acute today than it has ever been in its history,” said Al-Ubaydli.

“GCC countries benefit from a strong and stable dollar because it gives people confidence to invest here.

“The region’s governments are also wary of the haphazardness of US sanctions and so keep themselves connected to alternatives to the US dollar without necessarily being a cause of a transition away from the US currency.”

Higher interest rates would raise borrowing costs for Gulf governments and corporations. That would probably be felt most acutely in Saudi Arabia, whose Vision 2030 economic development and diversification programme entails building several so-called giga-projects such as the Neom region.

These will require substantial state and private sector borrowing to fund their construction.

US dollar strength also makes investing in Gulf assets such as real estate, stocks and regional companies costlier relative to other currencies.

“That’s more of a consideration during stable economic periods, whereas currently we’re in an era of great economic and geopolitical uncertainty and so the desire to invest in safe havens such as the Gulf overrides considerations about a strong dollar making assets relatively more expensive,” Al-Ubaydli said.