February 28, 2024

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America chooses, dollar loses?  – Comment Joost Terks

America chooses, dollar loses? – Comment Joost Terks



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Comment Joost Terks



It's 10:00 am today — Joost Derks

The dollar is rising as there is still some time left for US interest rate cuts. In a few months the focus of the currency world will turn to the presidential election. However, the question is whether it is wise to choose a position on that basis.

Last year, the financial world continued to hold its breath during the Federal Reserve meeting. However, this will not apply to the meeting scheduled for next Wednesday. The forecast is that the policy rate cut expected by investors will not happen yet. In December, US inflation picked up again slightly to 3.4%. Also, economic statistics indicate that the labor market is still tight. If Federal Reserve Chairman Jerome Powell chooses to cut interest rates, he will immediately undermine his carefully cultivated image as an inflation fighter.

Be careful with interest rates
So it is obvious that the focus of the financial world will gradually shift to the rest of 2024. Seven more Fed meetings are scheduled for the end of the year. US policy interest rates are expected to fall in small steps to around 4% this year. Ensuring interest rate cuts are not politically charged will be an interesting challenge for the Federal Reserve. A very rapid decline in interest rates could be interpreted as an attempt to boost the economy, which could favor incumbent President Joe Biden. On the other hand, staying in place too long can actually slow down growth.

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A stronger dollar with Trump?
The latter can work to a challenger's advantage. With Ron DeSantis dropping out of the Republican presidential race, Donald Trump is more likely to face off against Biden again. Ahead of Election Day on November 5, currency markets will undoubtedly respond to the candidates' economic direction. The perception is that Trump's trade sanctions will favor the dollar. Investment bank JP Morgan has calculated that a 10% increase in import duties could increase the trade-weighted value of the US currency by 4% to 6%.

Important lesson
On the other hand, Biden's investment plans could actually lead to a weaker dollar. High budget deficits and rising national debt could cause parties to lose faith in the American system. However, the practice during the respective presidential terms showed a completely different picture. Under Trump's administration, the dollar has fallen 13%, while the currency has risen 10% since Biden took office. There is an important lesson in this: It is wiser for an institution to set monetary policy based on the economy and interest rate developments than on politicians' cards.


Joost Terks

Joost Derks is a currency expert iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and does not constitute professional (investment) advice.