Donald Trump will return to the White House, winning in a surprisingly easy and decisive manner. The contest was for all intents and purposes over by midnight on the east coast. Trump won the aggregate US vote and the Senate is now red. Whether the Democrats pick up the House as long expected remains an open question.
A post-inaugural Trump will launch his budget-busting tax cut plans backed by a legislative branch poised to offer strong support, hit foreign countries with tariffs and restrict immigration. Markets have already reacted decisively – US note and bond yields soared, the dollar surged and stocks and crypto are up.
The current debt limit suspension extends till early January 2025 and the Treasury will deploy ‘extraordinary measures’ to push out the day of reckoning well beyond Trump’s inauguration. Congress hasn’t passed a budget for this fiscal year, instead running on continuing resolutions. Trump aims to cut the corporate tax rate and extend the 2017 tax cuts that expire at end-2025. Next year promises to be quite active on the fiscal front with little regard to debt and deficits. The Committee for a Responsible Federal Budget projects Trump’s tax plans will add $8tn to US deficits – net debt is now close to 100% of gross domestic product and $28tn.
Tariff plans may prove a bit murkier. Trump has substantial power to raise tariffs on his own without Congressional consent, especially on national security grounds. His aides have been at a loss to tell the ‘inside the Beltway’ crowd that Trump is transactional, the US is treated unfairly and that Trump’s proposals for a 10% across the board and 60% China tariff shouldn’t necessarily be taken literally but are threats aimed at securing better deals for America.
Trump’s plans to deport immigrants in the US and restrict further immigration may be more difficult to implement on the ground. Undoubtedly Trump will use executive authority and perhaps the ‘terrible’ immigration deal that Congress was ready to pass earlier this year but Trump rejected could be revived and touted as a win.
Impact on the dollar
Budget-busting fiscal policy and tariffs sent the dollar soaring during the first Trump term. Markets reacted with a sharp surge in yields and the dollar, the latter contrary to Trump’s aims to reduce the US trade deficit, as OMFIF long ago foreshadowed.
With inflation practically back to 2% and the Federal Funds rate coming down, Trump with his usual chutzpah may claim that the Federal Reserve is already under his thumb. But in the face of soaring yields, a Trump administration might choose to jawbone the Fed and pressure for a return to large-scale asset purchases or some form of Japanese-style yield curve control – echoes of the pre-Treasury-Fed 1951 Accord. Fed Chair Jerome Powell is ensconced till early 2026 and governors rotate out slowly, while the selection of regional Fed banks isn’t particularly political. An executive branch clash with an independent Fed may be in the offing.
The real trade-weighted dollar is already extremely strong (Figure 1). It will now ascend towards its extraordinary 1985 pre-Plaza Accord heights, which triggered substantial protectionist pressure and calls for currency action. Despite Team Trump’s calls for ‘devaluing’ the dollar, the path for doing so is filled with obstacles. Team Trump has promised to preserve the dollar’s dominant global reserve currency role; that is baked in the cake as there is no near-term alternative, but proposals for dollar devaluation and a 100% tariff on those who shun the dollar fly in the face of the promise.
Figure 1. Real trade-weighted dollar extremely strong
Source: Bank for International Settlements
Higher interest rates, a soaring dollar and restricting immigration is a recipe for lower long-term US growth after a shorter-term Trump expansionary fiscal sugar high ends.
But, as impactful as domestic economic policy changes may be, so are the foreign policy implications of Trump 2.0. The US focus on China will intensify amid rising tension, frostiness and conflict. More sanctions may become de rigueur. Trump will show little regard for Ukraine’s future and curtail US backing, double down on Israel Prime Minister Benjamin Netanyahu and cosy up to autocrats including Vladimir Putin.
Europe is already seen in the US as sclerotic, riven between nationalism and Brussels’ centralist pull, while taken for granted as an ally and partner. It may soon get short shrift, encountering neglect and prickliness.
‘Trump will clean up. It will be painful.’
European leaders reacted with private dismay but public calls for confidence in a continued robust US-European relationship. Ukraine faces renewed difficulties in amassing western support against Russia’s war of aggression. But few European politicians or diplomats believe Trump’s campaign rhetoric that he will immediately force Ukraine to make concessions in return for a potentially destabilising peace deal. Mark Rutte, the new Nato secretary-general and former Dutch prime minister, reminded Trump that the alliance helped ‘to advance US interests, multiply American power and keep Americans safe’.
Trump’s re-election will have a big impact on Germany’s embattled coalition under Chancellor Olaf Scholz. His win heaps more pressure on Germany’s troubled economy. Coalition parties meet on 6 November in Berlin to decide its fate. Left-wing members of the three-party grouping say Trump’s triumph makes it more necessary to continue the partnership, while the junior Free Democrat coalition partners lean in the opposite direction.
Wolfgang Ischinger, a former German ambassador to the US and UK, still an influential voice in European security matters, underlined European impotence by calling for Europe to ‘embrace’ Trump in an interview with the German daily Tagesspiegel. Emboldened by America’s strong economy and the stock market surge, Trump may emulate China by seeking to divide Europe through country-by-country trade accords rather than dealing with the European Union as a while. One senior European policy-maker was gloomy about what he called a ‘fracture’. He scotched the idea that Europe would pull itself together to confront the uncompromising future president: ‘Trump will clean up. It will be painful.’
Mark Sobel is US Chair and David Marsh is Chairman of OMFIF.
Mark is joined by Daleep Singh, US deputy national security adviser for international economics, on 22 November to discuss the G20 summit. Register to attend the virtual discussion.
