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The "Trump trade" is back in full force, shaking up global markets in the aftermath of the November 5th U.S. election. This resurgence has led to substantial shifts in both currency and bond markets, with the U.S. dollar index (DXY) jumping 2.0% + since election day. The impact on the euro-dollar (EUR/USD) pair—a key barometer of trade tension and my favoured expression—has been sharp, with the euro falling over 2.5%. It's a stark reminder that Trump's stance on trade will likely hit global markets hard, especially if tariffs are rolled out sooner rather than later.

We are on the right track here.  George Saravelos, Deutsche Bank's Global Head of FX Research, has been notably accurate in his recent bearish outlook on the euro. He posits that if President Trump's policy agenda is swiftly and fully implemented without countermeasures from Europe or China, the EUR/USD exchange rate could plummet below parity, potentially reaching 0.95 or lower. Such a decline would propel the real trade-weighted dollar to unprecedented highs, surpassing levels seen during the Volcker era. Conversely, a more measured scenario suggests a drop to 1.00, aligning with the dollar's historical peaks without exceeding them. Currently, the EUR/USD is hovering around the critical 1.06 mark, a pivotal level that could determine the currency pair's near-term trajectory.

In the bond market, a bear-flattening yield curve emerges as traders temper their expectations for Fed rate cuts through 2025, now estimating a modest 75 basis points instead of the pre-election forecast of 120. This recalibration has lent further support to the dollar, driving its strength. Meanwhile, Asian currencies, especially those closely linked to China’s economy, SGD, THB and MYR, are feeling the strain, highlighting the vulnerability of Asia's emerging markets to a robust dollar and tighter U.S. monetary policy.

The real question now is where Trump's policy playbook takes us from here. With the likelihood of a Republican-controlled Congress, Trump has a clear path to pushing aggressive moves without much opposition. His cabinet choices—especially the consideration of China hawks like Marco Rubio for Secretary of State—hint at a tough stance on trade, likely leading with tariffs. Given China's large and growing trade surplus, tariffs might even be a straightforward call for this administration.

Dollar bulls are betting on a specific sequence here: first up, trade restrictions and regulatory changes, laying the groundwork for later pro-growth measures like corporate tax cuts. This calculated approach could amplify the dollar’s strength, but the ripple effects will harden global markets. Rising inflation and a potential squeeze on growth may turn “Trump 2.0” into a volatile ride for the U.S. and the international economy. This speculated order of Trump’s policies might be exactly why we’re seeing a dose of the heebie-jeebies across global risk and commodity markets.

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