Brace for 'full-blown' currency wars under Trump
December 16, 2024 (Investorideas.com Newswire) Investors should prepare for heightened volatility in global markets as much-discussed potential trade wars risk morphing into full-blown currency wars under Donald Trump's leadership, warns Nigel Green, CEO of deVere Group, one of the world's largest financial advisory organizations.
While possible trade wars have dominated headlines, "the prospect of currency wars-where nations deliberately weaken their currencies for competitive advantage-remains underappreciated," he says.
Trump's track record and rhetoric point to a renewed focus on tariffs and dollar dynamics, two factors that could send shockwaves through financial markets and global trade systems.
"In Trump's previous term, his administration repeatedly signaled dissatisfaction with a strong dollar, accusing major trading partners, including Europe and China, of unfairly manipulating their currencies to gain a competitive edge. Currency movements became political weapons. As fiscal divergence widens across economies, this risk is resurfacing," warns Nigel Green.
"The seeds of a currency war are already being sown.
"A new Trump administration is likely to lean heavily on tariffs and protectionist measures, which historically have triggered retaliatory moves-both through trade and through deliberate currency depreciation. Investors must understand the consequences and position portfolios accordingly."
The dollar has strengthened significantly since the recent election, bolstered by the Fed's cautious stance on rate cuts and the comparatively robust US growth outlook. However, it's this very strength that could reignite tensions.
Trump's past policies indicate that a strong dollar-while beneficial in some respects-is seen as detrimental to the competitiveness of US exports.
In response, pressure could mount on trading partners like Europe and China to weaken their currencies, either through monetary policy or other interventionist tactics, to offset the impact of tariffs.
"We're currently seeing the Federal Reserve and European Central Bank (ECB) respond to divergent economic realities," explains the deVere CEO.
"The US is grappling with persistent inflation and a steady growth trajectory, keeping the Fed cautious on interest rates.
"Meanwhile, Europe faces stagnation and disinflation risks, with the ECB likely to keep rates lower for longer. These contrasting realities could exacerbate dollar strength and leave the euro exposed."
For investors, the interplay of trade and currency moves poses both risks and opportunities. If Trump follows through on significant tariffs-as markets increasingly expect-growth in major trading partners like Europe and China will take a hit. Central banks in these regions are likely to respond by loosening monetary policy further, suppressing interest rates and weakening their currencies.
China, for example, already faces economic headwinds and may look to the renminbi as a tool to absorb the shock of tariffs. In Europe, deposit rates could slide even deeper into negative territory as the ECB fights to stave off a recession.
"The knock-on effects are clear," says Nigel Green. "Weaker currencies in Europe and China would amplify dollar strength, while escalating tensions could force the US to counteract, intentionally or not.
"The potential for a chaotic spiral-where tariffs lead to currency devaluations and further retaliatory measures-is very real.
"A full-blown trade and currency war would hit risk-sensitive currencies, create inflationary pressures in the US, and disrupt global supply chains."
He concludes: "Trump's policies will create winners and losers across markets, and the dollar's trajectory will be a central focus. Investors who fail to prepare for the fallout of trade and currency conflicts risk being caught flat-footed in an increasingly volatile environment."
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