Earlier this month, SriKonomics discussed the lessons learned since the US presidential elections of November 5. More signals have continued to come in recent days. The focus of this article includes possible implications of changes in the dollar exchange rate, the price of gold, and interest rates, and what they presage for the first year of the new administration.
President-elect Donald Trump will assume office on January 20 when he will have the ability to fulfill campaign promises. Among them are an increase in trade tariffs on all countries transacting with the United States, and the implementation of a massive deportation of undocumented workers to create employment and higher wages for US citizens and residents. Fulfillment of the objectives, however, is likely to have other undesirable consequences that would not be politically or economically acceptable.
The first of the consequences has already started to be reflected in the dollar exchange rate. During his first presidential term, Trump repeatedly expressed his preference for a cheap dollar. The reasoning was that a depreciated currency would be a positive for US trade relations and result in an improvement in the balance of trade. And since inflation was low — annual inflation was 2% or lower in the pre-covid era — the inflationary consequences of a weak dollar were considered to be acceptable. The euro traded at $1.05 - 1.26 during the Trump presidency. Dollar depreciation was to be achieved by the Federal Reserve mainly through repeated reductions of interest rates which Trump demanded — and which Fed Chairman Jerome Powell refused to provide.
The story since this month’s elections has been markedly different. With Powell set to keep his office through May 2026 — 16 months into the second Trump presidency — a dollar weakening is supposed to take place with newly imposed tariffs as the policy measure. The dollar has, instead, gone the other way. The euro traded at $1.09 on election day — when several polls had indicated a coin-toss finish on whether Trump or Vice President Kamala Harris would be the victor in the presidential race — but went below $1.04 intra-day yesterday. While the stronger dollar may be a boon to US travelers considering a vacation in Europe, it is also likely to make the widening US balance of trade deficit worse — a key Trump concern.
The price of gold is another yardstick urging caution. After the initial reaction to the election when the price fell from record levels as the obverse of a rapidly strengthening dollar, it rose last week to almost the same level as immediately after the elections. What is the meaning of a simultaneous appreciation of the dollar exchange rate as well as a rise in the price of gold? With nothing to contradict the impression that the Federal Reserve and the European Central Bank will continue to lower interest rates in the coming months, gold is coming to its own as the ultimate safe haven. A flight from currencies — including the dollar — into gold is but the first step signaling an upsurge in inflation.
The third yellow light to watch is the behavior of the 10-year Treasury yield. From 4.29% on November 4, the yield closed last night at 4.41%. Notice that last week marked a period when dollar strength versus the euro, partly a result of rising bond yields, is taking place in the presence of a rising price of gold. The takeaway here is that the increase in bond yield was sufficient to attract funds from the euro into dollars, but not sufficient to attract investors away from gold into Treasurys. The yield may need to go higher for Treasurys to be competitive with gold.
There is a cautionary tale in all this for Scott Bessent, US Treasury Secretary-designate. As he tries to implement President-elect Trump’s campaign promises of reducing taxes and increasing trade tariffs, he needs to pay attention to the dollar and the gold price. What they mean for US Treasury yields would be critical.
While voters may not care so much about the dollar exchange rate or the price of gold, they are certain to react if the 10-year Treasury yield rises above 5%, taking the mortgage rate up with it.
Dr. Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
November 23, 2024
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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Predicting long us treasury yields is fiendishly difficult. I have been wrong so many times during my career. Foreign exchange is the same story. I would bet foreign governments will react to higher tariffs by increasing their own on our exports and depreciating their currencies. That could result in slower US growth and lower long term rates.