What a Trump Presidency Could Mean for the Dollar

Jens Nordvig, Co-founder and CEO of MarketReader, joins OPTO Sessions to discuss how the dollar might react during a second Trump term, the rise of ‘Trump Trades’, and the wider picture on inflation.

Jens Nordvig is Co-Founder and CEO of MarketReader, a platform that uses artificial intelligence to help investors understand how the market is moving by correlating economic shifts to geopolitical events. He is also the Founder and CEO of Exante Data, which develops proprietary data and analytical solutions for investors.

Which Way is the Dollar Heading?

“The most important currency in the world is still the dollar,” Nordvig told OPTO Sessions this week.

The dollar strengthened in the wake of the recent attempt to assassinate Donald Trump, and some investors have tried to “extrapolate the momentum” in so-called Trump Trades — market bets based on his return to the White House and the policies he will likely implement.

Nordvig says, “Lots of people in financial markets were looking to see, ‘Okay, are there any Trump-related trades we can do? Is the dollar stronger? Are certain parts of the equity market stronger? Maybe even in the crypto space.'

He himself believes that “it’s too early to do those trades.”

Nevertheless, a second Trump presidential term is a definite possibility. So, how might things unfold regarding the dollar and the wider economy?

Nordvig considers the last time Trump won the election: “If we go back to 2016 and look at what played out, we had big moves in the market in the first month: the dollar was significantly stronger, especially against the yen and the Mexican peso. Equities were a lot higher, rates started to move up.”

However, this time around, it’s “very hard to use a template.” The international currency landscape is different—particularly when considering the Japanese yen—and “a big stimulus could increase worries about inflation.”

After the infamous 27 June debate at which President Joe Biden underperformed, “the market traded much more on US Consumer Price Index data than what was going on in terms of the election probabilities”.

‘Weak Dollar President’ on the Cards?

In an interview with Bloomberg Businessweek last month, Trump suggested his aim is for the currency to weaken. Nordvig found this “very interesting. They asked Trump, ‘What are the key economic policies you want to implement?’ and the first thing he said essentially was, ‘I want to make sure the dollar is not too strong’.”

This could boost trading. “We know from the first Trump administration that trade policy — making sure US manufacturing is competitive — is something that’s on his mind, which is related to the dollar policy. He doesn’t like when other countries are manipulating their currencies down, which China historically has done, even if they may not be doing it now,” says Nordvig.

“Investors are quite concerned that there's going to be a big change,” says Nordvig. “It gets really tricky to find a policy that actually achieves a weak dollar without it being very problematic and costly.”

“You can limit capital inflows into the US, then maybe interest rates are going to go up — you don't want that. You can accumulate reserves like other countries are doing, but then you have to buy somebody else's assets. Maybe you don't want to buy Chinese bonds — it’d be politically very controversial to do that in the US.”

Nordvig believes that the key is diplomacy: leaders negotiating but “being tough with trading partners to force them to act” in a way that prevents foreign goods from flooding domestic markets and keeps currencies “at a reasonable level.”

“If there's one thing we know about Trump, it’s that he loves to negotiate.”

Interest Rates on the Slide?

Related to the dollar’s performance is inflation, and while we’ve been living in high inflation times, things are shifting.

This week, Federal Reserve Chair Jerome Powell suggested the central bank was ready to cut but first needed a bit more inflation data. Powell also faced questions concerning the political optics of a September cut—just one or two months before the election—but he insisted that would not be a factor in the decision.

“What’s interesting now is that the market is pricing in more than 25 basis points,” says Nordvig. That effectively means there are some market participants who think the first cut will be more than 25 bps. It could be 50, which is pretty aggressive. That’s a really big shift in the narrative.”

Nordvig notes annual patterns to factor in: “There has been a global tendency for inflation to be higher in Q1,” for example.

But he thinks the US economy is gradually softening. “We're in a kind of equilibrium where the economy is okay. It's definitely not as strong as it used to be, but it's not falling off the cliff.”

Nevertheless, Nordvig acknowledges it does depend on where one is standing.

“Lots of consumers are doing very well because look at where the equity market is—still very close to all-time highs. The consumers who own assets are not that worried about getting fired, and their assets are doing okay.”

On the other hand, “consumers low on the spectrum are not doing so well.”

Nordvig’s overall prediction on rates is much less spicy than the four cuts by year-end some investors anticipate.

“I think the Fed will be able to cut in September, but I think they will go gradually. The central case is they do a cut in September, take a breather, and do the next one in December, right? So it’s kind of the boring path.”