Trump Win Wreaks Havoc on Global Rate-Cut Expectations

Central bankers the world over are gauging whether their worst fears over Donald Trump will come to pass following his resounding return to the US presidency.

(Bloomberg) — Central bankers the world over are gauging whether their worst fears over Donald Trump will come to pass following his resounding return to the US presidency.

Trump has promised levies on US imports that would upend global trade, tax cuts that would further stretch the federal budget and deportations that could shrink the pool of cheap labor.

That poses two main risks: Slower economic expansion around the world and faster inflation at home that would make the Federal Reserve less willing to lower interest rates. The upshot could be a stronger dollar and reduced scope for developing nations to ease their own monetary conditions.

“If a jurisdiction as important as the US imposes tariffs of 60% to any other important jurisdictions — let’s speak about China — I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,” European Central Bank Vice President Luis de Guindos said Wednesday in London.

In Europe, Goldman Sachs penciled in an additional ECB rate cut, citing softer economic growth as a result of Trump’s policies. Faced with massive tariffs, expectations also built that China may loosen more than it had planned. Not all regions have that luxury, however. Emerging markets, eager to support their currencies, may get more hawkish.

Monetary officials got a glimpse of what may be to come on Wednesday. The dollar posted its biggest gain against major currencies since 2020, while a surge in Treasury yields prompted some authorities in Asia to pledge steps to protect their currencies.

As Trump neared victory, Reserve Bank of India Governor Shaktikanta Das was upbeat, telling guests at an event in Mumbai that his country is “well placed” and “very resilient” to deal with election spillovers and other global issues.

Even so, a sharp spike in the rupee followed by a period of relative calm suggests the RBI stepped in to defend the currency, according to Kunal Sodhani, a trader at Shinhan Bank India.

“When it comes to our domestic markets, we are not bystanders,” Das said. “We are very much in the market.”

It was a similar story in China, which has been firmly in Trump’s tariff cross hairs. State-owned banks sold dollars to support the yuan, which weakened more than 1%, according to traders who didn’t want to be identified.

What Bloomberg Economics Says…

“Trump’s election victory may herald a broad-based surge in tariffs for the global economy: he’s threatened to raise tariffs to 60% on goods imported from China and 20% for the rest of the world. That would bring average US levies above 20%, a level not seen since the early 20th century. America’s closest partners, Mexico and Canada, would be hardest hit. For most other countries, a relatively small shock to GDP would mask a big shift in trade flows away from the US.”

—Maeva Cousin and Eleonora Mavroeidi. Click here for full INSIGHT

The People’s Bank of China may have to ease policy more rapidly — potentially denting the yuan, according to Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. But nearby central banks may be less keen to do so if the Fed slows its own campaign.

“US markets may be cheering, but economies across Asia could be big losers,” Garcia-Herrero said by phone. “Trump’s policies would mean less room to cut just as central banks need it the most.”

The election tremors were felt in Europe, too — particularly in the east, which fears reduced US support for Ukraine as it tries to fend of Russian forces. Concerned about frostier ties between Washington and Brussels, traders drove the euro toward parity with the dollar.

The shadow of tariffs risks complicating the task of taming inflation without undermining economic growth. While Guindos said he expects price growth to quicken, he stressed that no conclusions can be drawn before exact policies are clear.

“There are two main fears here,” he said. “The first one is tariffs and protectionism that could have a detrimental impact on growth and inflation. And simultaneously fiscal deficits. You’ve seen the reaction of markets to the fiscal deficits in the US, the UK.”

Large US tariffs on China may have an “adverse effect” on Australia, though the Aussie dollar has so far shown limited reaction on a trade-weighted basis to Donald Trump’s election victory, a senior Reserve Bank official said Thursday.

“In terms of tariffs we just don’t know how big and who it’ll be applied to,” RBA Assistant Governor Christopher Kent told a parliamentary panel in Canberra. “The big concern is large tariffs on China, which may have an adverse effect on us.” 

Other US allies were also bracing for friction. Taiwan’s central bank, for one, sees Trump’s policies impacting the domestic currency, which slid the most all year.

Trump “will indirectly affect the Taiwan dollar by causing the rise or fall of the US dollar and foreign investors buying and selling Taiwan stocks,” Eugene Tsai, head of the central bank’s foreign-exchange department, said before the election results. 

Indeed, global currency markets were awash “America First” worries as Mexico’s peso and South Africa’s rand both sank. 

The Central Bank of Malaysia is “closely” monitoring global developments including the US vote and stands ready to manage market volatility and ensure orderly conditions, a spokesperson said by email.

Bank Indonesia said it was ready to stabilize the rupiah from excessive volatility after it traded at the weakest level in nearly three months. Governor Perry Warjiyo told parliament that a Trump win would likely keep the dollar strong and Treasury yields high.

—With assistance from Anisah Shukry, Grace Sihombing, Ruth Carson, Ruchi Bhatia, Saikat Das, Iris Ouyang, Jana Randow, Alexander Weber, Qianwei Zhang and Argin Chang.

(Updates with comments from Australian central bank official in 16th and 17th paragraphs.)