What another four years of Trump would mean for the euro
And a Biden presidency would change the relationship between the dollar and the European currency
Bloomberg’s insight
What another four years of Trump would mean for the single currency, and a Biden presidency would have a different meaning
– yes Bloomberg asks.
The weakness of the dollar has become a cause of distress for the European Central Bank, which does not have an official mandate to manage the euro, but always has the currency quite high in its mind. As I wrote earlier, a stronger euro partly reflects Europe’s better performance – so far – in managing the pandemic. Having a strong coin isn’t always a bad sign. The problem for the euro zone is that its economy, and that of Germany in particular, is dominated by exports. A highly appreciated euro and potentially bad news for producers in the region.
Although the euro fell a bit this week, after reaching around $ 1.20, it still appreciated by 6% this year.
Now, Trump is not a fan of the strong dollar. Indeed, this week’s ECB comments on dollar weakness have evoked some fears of a global currency war as politicians start making small verbal interventions on FX markets to try to restore balance. Nonetheless, the US stock market just had a great August and hit all-time highs, so it’s tempting to speculate that a Trump win would have been more positive for equities and the greenback. Many investors have performed well from this presidency.
At the same time, a Biden administration with a left-wing economic agenda would normally be problematic for financial markets. While there are still not many political details to worry about, nor any clear sign of Biden’s choice for Treasury Secretary, investors will be wary of a democratic government that spends a lot and takes over taxes.
A gradual shift towards modern monetary theory could also scare away the confidence of markets globally, especially if there is pressure on the US Federal Reserve to cross the Rubicon of monetary financing for government spending. All of this seems to suggest that Biden could mean a weaker dollar than Trump.
However, this is to dismiss Trump’s penchant for a weaker dollar in support of American producers. It also likely overestimates the market consideration for the current occupant of the White House and the political chaos it sometimes inflicts on the world. A Biden “sanity reward”, in which investors begin to favor the dollar again, cannot be discounted. Shares have skyrocketed even with the healthy pace of the Democratic challenger’s poll.
There are forces greater than the candidates at stake here too. The clear advantage the United States has enjoyed for decades over Europe in terms of economic growth and higher interest rates has declined. As a result, the dollar premium could shrink regardless of who the president is. It is the monstrous stimulus from the Fed that is the overwhelming factor driving the currency markets. The world is submerged in dollar liquidity; someone might change it right now
It is also clear that (with a few exceptions) European political leaders will far prefer the establishment of a Biden regime to Trump’s diplomatic agonies, regardless of exchange rate issues. About 15% of euro area exports are headed by euro area states, and the end of the recent wave of tariff disputes would be warmly welcomed. And even if the dollar remained low, the chances of a war between eurozone currencies would be much lower with Biden in charge.
