Opinion Economy Trump’s tariffs are bullish for GCC capital markets – for now King Dollar is currently the beneficiary of classic FX market overshooting By Matein Khalid January 20, 2025, 7:14 PM Chen Mengtong/China News Service/Alamy Scott Bessent, President Trump's nominee to be Treasury secretary, said during his Senate Finance Committee confirmation hearing that a 10% tariff could cause a 4% negative adjustment in the currencies of US trading partners The victory of Donald Trump in the US election last November has triggered a sustained period of US dollar accumulation in the foreign exchange market. Trump’s economic agenda promises punitive tariff rises on imports to the US from China, Mexico, Canada and the EU; tax cuts that will raise the national debt by an estimated $4.6 trillion over four years; and mass deportations to reduce the 11 to 12 million illegal immigrants in the US. Wall Street’s verdict has been unambiguous. Trump’s return to the White House equated to a material rise in inflation risk. This is the reason the yield on the 10-year US Treasury note rose sharply, from 3.6 percent on the eve of the Federal Reserve’s 50 basis point rate cut at the September Federal Open Market Committee (FOMC) to 4.81 percent a week before Inauguration Day. Now, slightly better-than-expected consumer inflation data has led to a fall in the bellwether 10-year note yield to 4.63 percent. In any case, the US dollar is extremely strong against the euro, sterling, the yen, the Canadian dollar and most emerging market currencies. At 109.4, the US dollar index is trading at 40-year highs, vindicating the message to the world of John Connally, President Nixon’s treasury secretary, the day in 1971 that the US unilaterally announced the end of the fixed gold-dollar Bretton Woods peg: “Our currency, your problem!” The rise in the US dollar index from 103 on the eve of the US presidential election also reflects the growth momentum in the US economy relative to the political chaos and economic sclerosis in France and Germany, as well as the property meltdown/financial distress in China. Anticipating Trump tariff risk, institutional investors have slapped a higher risk premium on European, Chinese and emerging market assets. At the same time, the artificial intelligence (AI) revolution has led to a tsunami of foreign buying in Silicon Valley’s mega-cap Big Tech companies. Ironically, the sheer strength of the dollar is now a threat to Trump’s economic policy objective of boosting US exports. Trump’s first term coincided with a secular fall in bond yields. That is no longer the case in January 2025 as he returns to the White House. The impact of Trump’s tariffs on world trade flows can simply not be quantified a priori The fact that the US dollar index fell 0.3 percent just because Trump spoke to President Xi of China hours before taking his oath of office describes the skittishness of Planet Forex to the slightest geopolitical flutter. Trump 2.0 also commences at a time when US Treasury bond yields and inflation rates are far higher than was the case during his first term. The yield differentials between Uncle Sam IOUs and German Bunds are far wider now, while the malign shadow of the Ukraine war darkens the geopolitics of Europe, particularly since Trump’s commitment to Nato is transactional and not unconditional. The Powell Fed has made it clear that it expects to cut policy rates only twice in 2025 if US inflation continues to fall to its dual mandate target of two percent; the ECB, for its part, has no option but to pivot to easy money at every meeting in order to avert recession risk. Above all, the impact of Trump’s tariffs on world trade flows can simply not be quantified a priori, the reason the US dollar has become a magnet for safe haven capital flows since the election. Planet Forex’s bottom line? Trump’s tariffs are unquestionably bullish for the greenback – for now. Scott Bessent, Trump’s incoming treasury secretary, estimated at his confirmation hearing that a 10 percent tariff could cause a four percent negative adjustment in the currencies of US trading partners. This explains the sharp depreciation of the euro, the Chinese yuan, the Canadian dollar and the Mexican peso since the election, though tariff risk is not the only factor behind these depreciations. The threat of a trade war coincides with US economic outperformance and the AI speculative mania. So King Dollar du jour is the beneficiary of classic FX market overshooting. What does this portend for the Arabian Gulf? The combination of tariff risk and US dollar strength is bullish for capital inflows into the Saudi stock market, especially as the Tadawul All Share Index is no longer overvalued, at 15 times earnings, and the dollar peg of GCC currencies is a major attraction for non-US fund managers. The higher bond yields in the GCC sovereign debt and sukuk markets are also attractive to fund managers eager to take advantage of US dollar strength available via the debt of Washington’s closest allies. Matein Khalid is an investor in global financial markets and board advisor to leading family offices in the UAE and Saudi Arabia Read more from Matein Khalid US Fed cuts will not prevent an oil-price crash in 2025 War, oil, safe haven assets and risk premium in the GCC The bullish case for the GCC’s sovereign bonds and sukuk