Citibank dollar forecast sees 5% jump in USD if Trump wins

Citi sees 5% rise in USD in dollar forecast if Trump wins November election

Analysts at investment bank Citi have forecast a 5% surge in the U.S. dollar and a downturn in bond markets should the Republican Party, led by Donald Trump, secure a comprehensive victory in the U.S. elections this November. This projection is partially based on the dollar's previous 5% increase following Trump's unexpected win in 2016 and a similar decline before the 2020 elections when Trump was defeated by the incumbent Democratic President Joe Biden.

The analysts believe a 5% increase in the dollar is a reasonable expectation should Trump reclaim the presidency and the Republicans take control of both legislative chambers.

Trump is currently seen as the probable Republican candidate for the November 5th election.

They also anticipate a scenario similar to 2020, where the dollar's movements were largely realized by the night of the election, as markets often anticipate election results. The analysts added:

"Therefore, we would expect the high in the dollar - potentially for the year - could very well be seen right around the election”.

At the time of writing on Tuesday, the U.S. dollar index (DXY) — a gauge of the greenback’s strength against six major peers — was 0.22% down at 104.06. The DXY index has gained 2.7% so far this year.

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Potential Republican victory could have biggest effect on bond markets

A comprehensive Republican victory is expected to significantly affect the bond markets, potentially triggering tax reductions, economic stimuli, and new trade tariffs against competitors like China. This could result in higher interest rates, a steeper yield curve, and an increased term premium, likening it to the bond market downturn in October amid concerns about rising U.S. debt levels.

"Long forward vol(alitity) on long-dated forward rates can be a carry friendly hedge for a Republican-sweep scenario, given that the long-dated vol has been trading directionally with the forward rates," the bank's analysts said.

The focus on Wall Street around the election period is expected to center on tax implications.

Citi’s analysts are speculating that Trump would likely focus on extending the current tax policies and possibly introduce additional corporate tax reductions.

However, they note that a "clean extension” of the current tax cuts, which are set to expire soon, could increase the U.S. government's deficit by over $3 trillion over the next decade.

"There is a question as to whether the Republicans will be comfortable adding trillions to the deficit under their control, particularly considering a one-term president," Citi said.

The bank’s analysts added that while Biden might also extend tax cuts, he may also raise some corporate taxes.