Central bankers around the world are assessing whether their worst fears about Donald Trump will come to fruition following his resounding return to the U.S. presidency.
The Risks of Tariffs and Protectionism
Trump’s election victory has sparked concerns that tariffs and protectionism could have a detrimental impact on economic growth and inflation. This has led to a sharp reaction in financial markets, with global currency markets awash ‘America First’ worries.
The Impact on Central Banks
The shadow of tariffs risks complicating the task of taming inflation without undermining economic growth. While European Central Bank president Mario Draghi said he expects price growth to quicken, he stressed that no conclusions can be drawn before exact policies are clear.
"There are two main fears here," Draghi said. "The first one is tariffs and protectionism that could have a detrimental impact on growth and inflation. And simultaneously fiscal deficits. You’ve seen the reaction of markets to the fiscal deficits in the U.S., the U.K."
Global Currency Markets
Global currency markets were awash ‘America First’ worries as Mexico’s peso and South Africa’s rand both sank. The Central Bank of Malaysia is "closely" monitoring global developments, including the U.S. vote, and stands ready to manage market volatility and ensure orderly conditions.
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The Reaction in Asia
Even so, a sharp spike in the rupee followed by a period of relative calm suggests the RBI stepped in to defend the currency, according to Kunal Sodhani, a trader at Shinhan Bank India. "When it comes to our domestic markets, we are not bystanders," Das said. "We are very much in the market."
It was a similar story in China, which has been firmly in Trump’s tariff cross hairs. State-owned banks sold dollars to support the yuan, which weakened more than one per cent, according to traders who didn’t want to be identified.
The People’s Bank of China may have to ease policy more rapidly — potentially denting the yuan, according to Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis. But nearby central banks may be less keen to do so if the Fed slows its own campaign.
"U.S. markets may be cheering, but economies across Asia could be big losers," Garcia-Herrero said by phone. "Trump’s policies would mean less room to cut just as central banks need it the most."
The Shadow of Tariffs on Global Trade
The election tremors were felt in Europe, too — particularly in the east, which fears reduced US support for Ukraine as it tries to fend off Russian forces. Concerned about frostier ties between Washington and Brussels, traders drove the euro toward parity with the dollar.
"The shadow of tariffs risks complicating the task of taming inflation without undermining economic growth," Guindos said. "We must be prepared for any eventuality."
Global Central Banks React
Beyond Europe, other U.S. allies were bracing for friction. The Bank of Taiwan sees Trump’s policies curbing the domestic currency, which slid the most all year.
"Trump will indirectly affect the Taiwan dollar by causing the rise or fall of the U.S. dollar and foreign investors buying and selling Taiwan stocks," Eugene Tsai, head of the central bank’s foreign-exchange department, said before the election results.
Central Banks Prepare for Market Volatility
The Central Bank of Malaysia is "closely" monitoring global developments, including the U.S. vote, and stands ready to manage market volatility and ensure orderly conditions.
Bank Indonesia said it was ready to stabilize the rupiah from excessive volatility after it traded at the weakest level in nearly three months. Governor Perry Warjiyo told parliament that a Trump win would likely keep the dollar strong and Treasury yields high.
"With assistance from Argin Chang, Anisah Shukry, Grace Sihombing, Ruth Carson, Ruchi Bhatia, Saikat Das, Iris Ouyang, Jana Randow, Alexander Weber and Qianwei ZhangBloomberg.com"
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