Wall Street Bets on a Trump Dollar Rally Ignore 40 Years of Data

(Bloomberg) -- Wall Street bets that a second Donald Trump presidency will set off a rally in the dollar run in the face of history, according to a working paper that analyzed almost 40 years of data.

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Pasquale Della Corte of London’s Imperial College Business School and Hsuan Fu at Quebec’s Universite Laval found there is a statistically significant relationship between exchange-rate returns and US presidential cycles.

The study, which hasn’t been peer reviewed yet, shows the dollar on average climbs 4.2% a year when Democrats were in power and slides 1.3% with Republicans. During Trump’s first term, the currency slumped 10% on a trade-weighed basis.

The findings go against a growing number of predictions from banks including Barclays Plc, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc that Trump’s proposed mix of export tariffs and tax cuts will boost the dollar, while spurring inflation and a potential for interest-rate hikes. The study suggests the key factor to watch out for is trade strategy, which historically has had the biggest impact on the greenback.

“We found that US presidents and their trade policies matter significantly to the dollar,” Della Corte said in an interview. “In contrast, we find no relationship of these returns with cross-country interest-rate differentials or inflation differentials.”

One working theory the academics put forward is that the kind of trade barriers often pursued by Republicans lead to retaliation, hurt global trade and ultimately reduce dollar demand.

“We are not making a political statement. It’s what our study showed,” Della Corte said.

Trump has proposed a 10% tariff on all imported goods and much higher rates for China. He also targets the European Union for a potential slew of punitive trade measures and has floated the idea of turning foreign aid into a loan.

Since 2017, the US currency policy favors a weaker dollar, a drastic shift from a decades-old preference for a stronger currency. The change, which started under the Trump presidency and was adopted by the Joe Biden administration, is meant to bolster inward-looking economic policies aimed at reviving the American manufacturing sector.

While the Treasury Department is the steward of US currency policy, it is the actions of the Federal Reserve that affect the dollar’s exchange rate more than fiscal policy.

Market bets

The potential outcomes of the November election aren’t yet driving moves in the currency market, with traders more preoccupied with the potential for interest-rate cuts. But forecasts from strategists at some of Wall Street’s biggest banks suggest a consensus forming around a bet that a Trump win will be good news for the dollar.

Analysts at Barclays estimate a direct boost to the greenback of up to 3% from Trump’s proposed tariffs, while strategists at JPMorgan forecast potential gains of 4%-6% saying increased competition between the US and China will be positive for the greenback. Citi and Wells Fargo also see scope for dollar upside related to Trump’s possible win.

“Markets will start to price in some of the election risk now, the big focus being the risk of a Trump presidency and the risk of escalation in the tariffs,” said Charu Chanana, head of FX strategy at Saxo Markets in Singapore, adding this will bring safety bid for the dollar.

Della Corte started looking into the impact of politics on currencies in 2016 after noticing that Britain’s vote to leave the European Union and Trump’s election bid were causing heightened volatility. He first produced a paper on the findings together with Fu in 2018. The latest version — Presidential Cycles and Exchange Rates — was updated this year.

The academics focused on the US because the country has reliable election timetables and its political parties have relatively predictable policy positions. Their study also tested the impact of variables including interest rates and pre-existing economic conditions.

Della Corte stressed that the study applies more to policy than individual candidates. If a Republican president shifted their stance in favor of trade agreements or if a Democrat became more restrictive, the historical findings would be less relevant, he said.

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