Dollar's future: Trump's wishes and economic implications

[Ben Graham]

Beware of your wishes. Donald Trump dreams of the lowest interest rates in the world and a weak dollar. This combination would reduce the cost of debt servicing, stimulate economic growth, and enhance the competitiveness of American manufacturers. However, this is a double-edged sword, as there are negative effects and clear contradictions between the president's desires and economic theory. These contradictions undermine confidence in the greenback and empower bulls in the EUR/USD market.

In April, the White House raised the average tariff on imports from 2% to 14% in an effort to reduce the colossal trade deficit the United States has with other countries. Along with tariffs, Trump believes that a devaluation of the dollar will contribute to this effort. However, if exports from other countries to the US decline, as they are currently doing, non-residents will receive fewer dollars. As a result, there will be little incentive to purchase Treasury bonds, and Washington will face challenges in financing the budget deficit.

Dynamics of US Trade with Other Countries

The president aims to reduce the federal funds rate to 1% or lower while simultaneously celebrating an acceleration of US GDP to 4.3% in the third quarter. However, low inflation cannot coexist with a strong economy. When people earn good money, they spend it, causing prices to rise. The Fed is not a one-man show. Even if the new Federal Reserve chair shares the same wishes as Donald Trump, they will need to convince the other FOMC members to adopt a looser monetary policy.

So far, the primary argument of the doves has been a cooling labor market. However, unemployment cannot rise indefinitely in a strong economy. Yes, companies are optimizing costs due to tariffs by laying off workers. However, by 2026, they will adapt.

Dynamics of Federal Reserve and Other Central Banks' Rates

In my view, the fate of the US dollar will depend on the pace of economic growth. The consensus forecast from Bloomberg experts projects a 2% expansion of the US GDP in 2026. Goldman Sachs believes it will be better—growth of 2.6% due to favorable financial conditions, companies adapting to tariffs, and a wave of $100 billion in tax refunds as part of the "One Big Beautiful Bill Act." Citi estimates this at $30-50 billion and forecasts a GDP expansion of 2.1%.

The more positive news that comes from the US economy, the less likely the Fed is to lower interest rates in March. The odds for a rate cut in that month have fallen below 50% following the GDP data from the third quarter and unemployment claims. A prolonged pause in the cycle plays in favor of the US dollar.

From a technical perspective, the daily chart of EUR/USD shows the formation of a 20-80 pattern and the pair's return to the fair value range. Short positions opened at 1.1795 should be held for now. The future of the euro will depend on the bulls' ability to return to this important level.

The material has been provided by InstaForex Company - www.instaforex.com