Trump’s Ascension To Presidency May Weaken The Dollar, India Poised To Benefit

Trump and his running mate, JD Vance, advocate for a weaker dollar to enhance US export competitiveness and bolster domestic manufacturing. This stance could potentially benefit emerging markets like India.

However, it’s worth noting that immediately after Trump’s proposal on July 14, the US dollar saw its first weekly gain in a month. This rally was fueled by speculations surrounding the US Federal Reserve’s upcoming policy decisions rather than direct implications from the upcoming US election.

Looking ahead, a Trump victory in the election is expected to lead to a devaluation of the US dollar over the long term. Historically, emerging market equities tend to perform well during periods of dollar depreciation.

When the dollar strengthens, there is typically a flow of capital back into the US. According to the International Monetary Fund (IMF), the proportion of global capital flowing into the US nearly doubled to 41% in 2023 from 23% between 2017 and 2019.

Conversely, despite high US interest rates and a stronger dollar in recent months, inflows into emerging markets (excluding China) have remained robust. Combined inflows into emerging markets, excluding China, reached $110 billion in 2023, the highest since 2018 according to IMF data.

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Global investors seeking higher yields may increasingly turn to more resilient economies such as India. Foreign portfolio investors have already injected over $2 billion into Indian equities this year, alongside nearly $10 billion into the country’s bonds in 2024 alone. This trend is expected to gain momentum, particularly with the potential for a Trump presidency beginning next year.

For example, Bloomberg highlighted that Lombard Odier Investment Managers intends to enhance its exposure to Indian high-yield dollar credit within its $2 billion Asian bond strategy. This move comes after this sector contributed significantly to the fund’s top performance, outperforming 96% of its peers this year.

A depreciating US dollar would result in cheaper imports for many commodities that India sources from other countries, including crude oil, coal, chemicals, gold, defense equipment, electronics, and various other items.

In February 2024, a Washington Post report indicated that Trump intends to impose a 60% tariff on imported Chinese goods. In a subsequent interview, Trump emphasized, “it’s going to be more than that.” Such a measure would undoubtedly influence capital flows as well.

Assessing Risks to Dollar Strength Under a Potential Trump Presidency

The predominant view is that Trump’s policies favor business, potentially attracting investment with promised tax cuts upon assuming office. Investment into non-tech sectors could rise as Trump and Vance oppose big tech’s dominance. Whether this capital shift originates from other regions or reallocates profits from the AI-driven market surge remains uncertain.

Ongoing geopolitical developments in the Middle East and Europe pose additional variables that could support the dollar’s stability. According to Helen Given from Monex Inc., investors maintain confidence in the dollar’s status as the global currency of choice, regardless of domestic political uncertainties. “Investors still have faith that the dollar itself, regardless of the state of the actual government, will continue to be the global currency of choice and keep value in a fraught political situation,” Helen said.

The evolving political landscape in the US, including potential changes in the Democratic Party’s presidential nominee, introduces further market volatility as the election cycle progresses.

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