Both Trump and his running mate, JD Vance, desire a weaker dollar to make US exports more competitive and local manufacturing stronger. That could be good for emerging markets like India.
However, one must note that the US dollar clocked its first weekly gain in a month right after Trump was shot on July 14. The rally was driven by speculation about the US Federal Reserve’s likely policy stance in September, more than the likely results of the upcoming US election.
In the long run, if Trump wins the election, the US dollar will likely lose value, and emerging market equities typically do well when the greenback weakens.
When the dollar strengthens, money flows back to the US. According to the International Monetary Fund, the share of global capital flows into the US almost doubled to 41% in 2023 from 23% between 2017 and 2019.
On the other hand, in recent months, inflows into emerging markets, except China, have remained strong despite US interest rates being at a 20-year high and the dollar getting stronger. The combined inflows into EMs, barring China, was $110 billion in 2023, the highest since 2018, as per IMF data.
Global capital seeking higher yields may find a destination in more resilient economies like India. Foreign portfolio investors have invested a over $2 billion dollars in Indian equities this year, and nearly $10 billion in the country’s bonds in 2024 alone.
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The trend will likely be accentuated by the potential for a Trump presidency starting next year.
For instance, Bloomberg reported that Lombard Odier Investment Managers will expand exposure to Indian high-yield dollar credit in its $2 billion Asian bond strategy after the sector helped the product become a top performer by beating 96% of its peers this year.
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A weaker US dollar would mean cheaper imports of many items like crude oil, coal, chemicals, gold, defence equipment, electronics, and a bunch of items that India gets from other countries.
In February 2024, a Washington Post report said that Trump plans to impose a 60% tariff on imported Chinese goods. In a subsequent interview, Trump said, “it’s going to be more than that.” A move like this would definitely impact capital flows too.
The biggest risks to the premise that the dollar may weaken if Trump wins
The overwhelming consensus is that Trump is good for business. If voted into the White House, he has also promised tax cuts, which could make the US an attractive investment destination.
Money may flow into non-tech stocks because both Trump and Vance have been vocal against the dominant and influence of big tech. It’s to be seen if these investments into traditional sectors like manufacturing come from other geographies or if they will be taken out of the profits from the rally driven by the euphoria around artificial intelligence.
The geopolitical risks in the Middle East and Europe are still evolving; another factor may keep the dollar afloat. “Investors still have faith that the dollar itself, regardless of the state of the actual government, will continue to be the global currency of choice and keep value in a fraught political situation,” Helen Given, a foreign exchange trader at Monex Inc., told Bloomberg on July 20.
Last but not least, it’s too soon to call the election, and there may be volatility as politics plays itself out in the world’s largest economy and financial market. For instance, a change in the Democratic Party’s nominee for President may affect the dollar’s value.
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