Saxo Bank: US Dollar in the spotlight as world awaits the market reaction to Trump’s protectionist policies

Saxo Bank’s Head of FX Strategy says a continuation of the recent US dollar strength will pressure countries across the Middle East

The loud proclamation of US President Donald Trump’s inauguration speech to support protectionist measures has strong potential to be US-dollar supportive, however there are real fears that his “America First” strategy could lead to a global trade war, according to John J Hardy, Head of FX Strategy at Saxo Bank, the online trading and investment specialist.

While Trump’s reign as President is being seen as a new era of US politics, there are still substantial question marks over what the new US policy mix will be and what it will mean for the US dollar.

Speaking at a special event in Beirut, Hardy said: “The US dollar is the world’s reserve currency and recently traded at its highest levels in years. The whole world needs to know what is going on with the dollar, in particular, countries across the Middle East, where key currency pegs in the region will come under increasing focus should the US dollar continue to strengthen.”

Many of Trump’s policy measures are considered highly US dollar-supportive, says Hardy. “Policies like the border-adjustment tax would likely lead to a powerful reduction in the US trade deficit, and the more the US reduces its current account deficit in general, the higher the risk of an offshore USD shortage. Reshoring of some industries and domestic investment on corporate tax breaks could be another source of large US dollar inflows.”

“On the other hand, the less USD-supportive scenario would be a global trade war with a less than zero-sum game as other countries would retaliate, and that seems to be at the heart of the current unease. Furthermore, some see Trump getting aggressive on other countries’ currency policies, most notably China, posing a risk of a new and higher-stakes chapter in the global currency wars.”

There have been many parallels drawn already between Trump’s US-first fiscal plans and those imposed by former President Ronald Regan, and a belief that Trump’s policies could encourage domestic-bound investments. However, back in the early 1980s, the US balance sheet for both public and private was less than half as leveraged and interest rates were about to decline. The challenge for Trump is that interest rates have hit record lows and the economy is more leveraged than it has ever been.

Hardy says: ”There is a real risk that the only kind of growth we will see will be the ’wrong kind’ – that is due only to fiscal extravagence. We expect that higher interest rates will challenge economic growth and may eventually lead to a tightening of credit and a slowdown in momentum later this year.