A strong dollaror too strong, presents some side effects. This is what he points out Matthew Ramenghi, Chief Investment Officer of UBS WM Italy who in his weekly report focuses on the consequences that the presidential elections in the United States will have on the dollar in the coming months.
USA, what dollar will the next president want?
“The current strength of the US dollar reflects higher economic growthand, consequently, higher interest rates than much of the developed world,” Ramenghi explained. “In addition, there are ongoing military conflicts and the dollar has traditionally played the role of a safe haven.” A strength increased by “marked outperformance of the US stock market” and “domination in artificial intelligence know-how” which attracted huge capital flows in the first part of the year.
The Difference Between Democrats and Republicans
The analyst pointed out that if from Kamala Harris and the Democrats There have been no explicit indications on the exchange rate, Donald Trump and JD Vance have clearly expressed a preference for a weaker dollar to reduce the US trade deficit and restore American manufacturing power, including with the help of tariffs. “They have even questioned the status of the USD as the world’s major reserve currency,” he added. In real terms, the dollar is currently trading 10-20% higher than it was in 2016-18, during the early part of Trump’s presidency. The flip side is that a weaker dollar, especially if combined with higher tariffs and lower immigration, in line with Trump’s agenda, could boost inflation and therefore delay further interest rate cuts.
The Role of the Fed
Usually, in the medium term, economic data drives exchange rates, Ramenghi recalls. The US deficit is high and a possible increase could fuel concerns about the sustainability of the debt, especially considering a public budget deficit that has long been above 5%. In this scenario, the Fed could reduce rates to make it easier debt managementbut this would lead to a period of dollar weakness. Although less significant in the short term, the BRICS attempt to make their economies less dependent on the US currency by encouraging trade in their own currencies could lead to a decrease in demand for dollars in the long term.
What to expect
“It is unlikely that we will see the dollaro lose the status of principal vreserve currency for the foreseeable future, especially since there is no immediate alternative,” the analyst said. “The yield differential between the dollar and other major currencies will not narrow significantly in the coming months and geopolitical uncertainty could also remain elevated,” he added. “However, we do not expect the dollar to rise significantly given current valuations.” new estimates from UBS they therefore point to a half-point cut in interest rates in September and a further reduction of the same amount by the end of the year, effectively realigning the trajectory of monetary policy with that of other advanced economies in the coming months. “In the short term, the dollar could remain around current values, but we expect the exchange rate to weaken progressively in the coming year. In our view, the long period of strength of the dollar could therefore come to an end. Furthermore, the high deficit will weigh on the currency in the long term”, concludes Ramenghi.
