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2024 US Election: Will the Election Change the De-Dollarisation Debate?
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2024 US Election: Will the Election Change the De-Dollarisation Debate?

·
5 min.
Agustin Mackinlay
INDEX

As the US election approaches, financial risk managers at corporations are assessing the likelihood of a renewed episode of volatility in FX and credit markets. In our previous blog, we discussed the policy proposals of Kamala Harris and Donald Trump regarding trade and tariffs. 

Before considering in more detail how treasurers and FX risk managers can prepare for November 5, we analyse in this blog the candidates’ policy proposals regarding the currency that, according to BIS, is on one side of 88% of all foreign exchange transactions: the mighty US dollar. 

Quite obviously, there is much at stake whenever policies regarding the US dollar are put on the table. For this reason, it may be worthwhile to ask:

  • What are the candidates’ main policy initiatives? 
  • Do the current proposals reflect noise or substance?
  • Should treasurers pay attention to ‘de-dollarisation’ talk? 

Setting the stage: US dollar policy and the candidates

The most dramatic statements regarding the next US government dollar policy are made by Republican candidate Donald Trump. This doesn’t mean, however, that the Democratic party candidate Kamala Harris is completely absent from the wrangle. 

In fact, the recent decision of the US Federal Reserve to lower the key reference rate by 50 bps to 4.75%-5.00% in September is seen by some observers as a partly politically motivated move to favour Ms Harris’ prospects on November 5.

Elon Musk, the pro-Trump flamboyant founder of EV company Tesla and owner of the social network X (formerly Twitter) also denounced the political orientation of US fiscal policy as “election interference”, at a time when the US Treasury added $433bn in debt in a matter of weeks. 

Yet, it is Donald Trump who —once again— steals the show when it comes to policy proposals. On the one hand, he has dropped hints about upending the independence of the US Federal Reserve, the central bank of the United States. On the other hand, he has vowed to preserve the status of the dollar as the world’s key reserve currency. 

The battle for the Federal Reserve

Mr Trump’s rhetoric about upending the independence of the Federal Reserve (Fed), the US central bank is pretty straightforward: "I feel the president should have at least a say in there," he recently told reporters at his residence in Florida. 

He went on to add: "I think [...] I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman." The Republican party candidate is also on the record for mocking Jerome Powell, the current chair of the Fed Board of Governors: “You show up to the office once a month, flip a coin, and everybody talks about you like you are a god.” 

A president in charge of the nation’s monetary policy would be reminiscent of Turkish leader Tayyip Erdoğan’s attempt to forcefully lower TRY short-term interest rates in 2022, in the belief that long-term bond yield would follow suit. As it turned out, the rout in the Turkish lira went hand in hand with much higher bond yields. 

Needless to say, such a script would make it more difficult for FX risk managers to ‘read’ the forward curve of the US dollar against other currencies, as a short-term forward premium could conceivably coexist with a long-term forward discount. 

But is this a realistic scenario, or is it mere ‘noise’? Only in 2026, assuming a compliant Senate, could Donald Trump try to appoint a Fed chair more of his liking. Even then, the newly appointed Fed chair would have to contend with the other 11 members of the Federal Open Market Committee.

US presidents have less latitude in monetary policy than they have in terms of trade tariffs. Yet, attempting to upend the independence of the Federal Reserve would not be a trivial matter. As Harvard’s Jason Furman points out, this is a scenario with a relatively low probability—but with potentially grave consequences. 

De-dollarisation talk: should treasurers pay attention?

In yet another US dollar-related proposal, the Republican candidate has stressed his commitment to preserving the status of the USD as the world’s reserve currency in the face of BRICS countries' de-dollarization talk.

Donald Trump’s economic advisers have considered a range of actions to penalise nations trading in currencies other than USD. According to Bloomberg News, such retaliatory measures include:

  • Export controls
  • Accusations of currency manipulation
  • Still higher tariffs

Should treasurers concern themselves with this issue? The answer is yes—provided that we arrive at a proper assessment of what de-dollarisation means. De-dollarisation, as put forward by BRICS countries, is about relinquishing the use of USD in bilateral trade. 

Is this a realistic possibility? According to the Bank for International Settlements, USD dominance is evident across all FX instruments and counterparties: “At least 85% of trading in the spot, forward and swap markets feature USD in one leg of the transactions”. This state of affairs is unlikely to change any time soon.

But there is another side to the de-dollarisation debate. Thanks to Multi-Dealer Platforms such as 360T, corporate treasurers can execute trades —in favourable liquidity conditions— in the currencies of several small, but well-managed economies: SEK, NOK, CAD, AUD, NZD, SGD and KRW. 

This allows finance teams to expand the range of currencies used in day-to-day commercial operations. As opposed to the top-down, politically motivated de-dollarisation, this is a genuine, bottom-up process driven by technology. It allows treasurers to embrace currencies. As such, it is a welcome development for FX corporate managers.

Scenarios for the US dollar

Just as with the issue of trade tariff policy analysed in the previous blog, US dollar policy proposals put forward by Kamala Harris and Donald Trump contain enough imprecisions and “what ifs” to make it virtually impossible for CFOs and treasurers to arrive at a detailed scenario analysis.

One possibility, in the event of Mr Trump achieving a “big win” (these are his own words), would be a continuation of the current scenario of sustained dollar strength. This would result from the combination of:

  • Trade tariffs
  • Tax cuts
  • Fed-induced liquidity contraction

But such an outcome would create uneasiness. The former president has explicitly singled out the USD-JPY and USD-CNY exchange rates as providing Japan and China with an “unfair competitive advantage”—a slogan that resonates well in key mid-western swing states with a heavy manufacturing presence.

Would USD strength lead the US Treasury to sell dollars, or to label China a currency manipulator? Or would it set the stage for a costly and prolonged battle for the independence of the US central bank? All of this remains to be seen. In the final blog of this series, we will outline a series of steps for corporate treasurers to prepare for the aftermath of November 5.

Agustin Mackinlay
Agustin Mackinlay is a Financial Writer at Kantox. He has previously worked at an investment bank specialising in Emerging Markets. Agustin teaches several courses in Finance at LaSalle University and EAE Business School in Barcelona. He holds degrees from the University of Amsterdam and from the Kiel Institute of World Economics in Germany.
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