With Trump entering his second presidential term, the market is keenly interested in the future trajectory of the US dollar. The multifaceted impacts of Trump's policies, intertwined with external factors such as international oil prices and geopolitical concerns, collectively determine the medium- to long-term performance of the dollar.
Tax Cuts and Tariff Policies Drive Economic Growth, But Pose Inflation Risks
The Trump administration plans to stimulate the economy through further tax cuts, including reducing corporate tax rates to 21% or 10% and making some tax cuts permanent. Additionally, there is a proposal to invest $500 billion in infrastructure. These policies might boost the economy in the short term, but the public deficit is expected to increase by $6.8 trillion over the next decade, potentially raising the debt-to-GDP ratio to 143%. To address fiscal pressures, Trump plans to expand treasury issuance, which may elevate bond yields, thereby exerting downward pressure on the dollar.
Concurrently, Trump plans to impose tariffs of 10%-20% on imported goods, elevating the average US tariff rate from 2.3% to 17%. High tariffs could push inflation upward and might marginally support the dollar by reducing the trade deficit. However, the long-term effects of such trade policies are limited and might only reduce the trade deficit by 0.4 percentage points.
Federal Reserve Policy Direction and the Dollar Under Pressure
The Trump administration might advocate for further monetary easing to support the economy and lower borrowing costs. However, the independence of the Federal Reserve will play a pivotal role. Trump has the opportunity to appoint several Federal Reserve board members, potentially leading to a more dovish monetary policy stance, with lower rates constraining the upside for the dollar. Yet, inflation might prompt the Federal Reserve to maintain high interest rates. Research forecasts suggest that Trump's comprehensive policies could raise the inflation rate to 6%-9.3% by 2026, significantly above the baseline estimate of 1.9%.
The Dynamic Relationship Between International Oil Prices and the Dollar
As the world's largest oil producer, the US's play in oil prices significantly impacts the dollar's movement. Over the medium to long term, the OPEC+ alliance ensures price stability through supply control, with rising oil prices potentially increasing market demand for the dollar, thereby boosting its value. Meanwhile, the long-term effects of economic restructuring and the rise of renewable energy on oil prices are yet to be fully realized.
Geopolitics and the Dollar as a Safe Haven
Geopolitical risks continue to support the dollar. Both the dollar and gold, as safe-haven assets, are consistently favored by the market. Driven by resource disputes and power struggles, the dollar may strengthen temporarily due to safe-haven demand. Moreover, the dollar remains dominant in international payments and as a reserve currency, currently accounting for 59% of global foreign currency reserves, making it difficult to be replaced by other currencies in the short term.
Comprehensive Analysis: The Tug-of-War Between Opposing Forces Determines the Dollar's Path
Trump's policies, while promoting economic growth and increasing inflation, also introduce deficit and debt pressures, adding complexity to the dollar's trajectory. External factors, such as international oil price regulation and geopolitical risks, may provide support to the dollar. Looking ahead, the market needs to closely monitor the specifics of policy implementation and changes in the global macro environment, which will together shape the dollar's long-term path.
