Trump's Progress a Euro-Dollar Negative: Berenberg, KBC

Stock image of President Donald Trump. Official White House Photo by D. Myles Cullen

Leading European bank analysts say another Donald Trump presidency would be good for the Dollar and undermine the likes of the Euro and Yuan.

The call follows news Trump has taken a step closer to the White House after beating Nikki Hayley for the Republican nomination in New Hampshire.

"While it’s too early to contemplate the eventual outcome of this year’s US elections, we believe that Trump and USD momentum might go hand in hand," says Mathias Van der Jeugt, an analyst at KBC Bank.

Trump beat Hayley after securing 12 of the 21 delegates with approximately 55% of the vote.

Betting markets and polling suggest Trump stands a 50-50 chance of beating incumbent Joe Biden.

For Euro-Dollar, the implications of a second Trump term arise from any protectionist policies he might enact and geopolitical risks centred on Russian finally grabbing Ukraine. KBC Markets says Euro-Dollar faces downside risks, "not specifically because of USD-positive domestic policy, but rather for a foreign policy which could be negative for the likes of EUR, CNY."

The next major Republican primaries are in South Carolina on 24 February and Michigan on 27 February where 50 and 55 delegates respectively are available.

"At this stage, financial markets should not be surprised if President Trump secures the Republican nomination or even wins the presidential election," says foreign exchange strategist Carol Kong.

The implications for the European Union of a second Trump term are notable, according to Holger Schmieding, an economist at Berenberg Bank.

"We would expect Trump II to be even more protectionist... his short-sighted and transactional 'America first' approach to foreign policy and his disdain for multilateral institutions such as the European Union could weaken international alliances."

Image courtesy of Berenberg.

Berenberg forecasts a stronger Euro-Dollar exchange rate in 2024, with the pair hitting 1.15, but this forecast would be reviewed under a Trump victory.

Such a victory "could initially mean a somewhat stronger US dollar if geopolitical uncertainties drive some safe-haven flows into the US," says Schmieding.

He also warns the Federal Reserve might cut rates by less than markets are anticipating if Trump were to loosen fiscal policy, which can boost U.S. bond yields and the Dollar.

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In fact, Schmieding says Europe faces a "moment of truth" as Trump approaches the White House:

"A Trump victory could have a bigger impact on Europe than on the US. As before, more protectionism and the risk of a trade war with the US would hurt the smaller and more export-oriented European economies more than the US.

"The specific risks which Trump could entail for Europe could cloud investor sentiment towards Europe even a few months ahead of the election already. If so, European markets may underperform US markets once the US vote approaches later this year."

Image courtesy of Berenberg.

But Ukraine is potentially the most significant source of weakness for Europe, given Trump's apparent antipathy towards Ukraine's plight and an historic respect for Vladimir Putin.

"Europe may have a sobering rendezvous with reality. We would not be surprised if Trump were to cut US aid to Ukraine – unless Europe pays for US weapons for Ukraine," says Schmieding.

The Kiel Institute confirms the EU and its member countries as being the largest providers of donors to Ukraine, but half of the military aid has come from the U.S.

"Paying for all the advanced US weapons which Ukraine needs to prevail against Russia and shouldering almost all the costs of Ukrainian reconstruction could tax the cohesion of the EU more than any other decision before," says Schmieding.

And Europe might have little choice but to step up, with the Berenberg analyst suggesting the EU may need a new common borrowing programme similar to (but likely significantly smaller than) its post-pandemic €750bn NextGenEU programme of 2020.

Germany might also need to adjust its constitutional debt brake accordingly to raise its support for Ukraine much further.

"To muster the political will across Europe to do so would be a challenge, to put it mildly. But if Europe were to fail the test, Europe and the world could be an even more dangerous place," says Schmieding.