Global financial markets are on high alert, filled with uncertainty surrounding the implementation of President-elect Donald Trump's promised tariffs. According to Bloomberg, many traders and investors are betting on a surge in volatility in the foreign exchange market once Trump's policy agenda begins to unfold. Trading activity is expected to soar, with daily fluctuations potentially reaching as high as $7.5 trillion.
After several years of relative calm, the annual volatility of the euro-dollar exchange rate spiked following the US presidential election, prompting many currency strategists to dramatically revise their forecasts. It remains uncertain how quickly the newly elected president will implement his policies such as trade tariffs. Experts believe that substantial tariff hikes could have a profound impact on currencies such as the euro. As analysts note, uncertainty is the defining characteristic of Trump's second term. "It’s an environment where FX becomes particularly interesting," Julian Weiss, head of G-10 vanilla FX options at Bank of America, said. He also highlighted growing demand for long-term products.
This marks a sharp turnaround in the global financial market from the past few years, when central banks alternated between raising and lowering interest rates, creating what was referred to as a period of "extreme calm." However, key trends remain vague. Experts are confident that Trump will stick to his "America First" strategy, with his economic policies likely to spark a new wave of inflation in the United States. Market participants also anticipate a widening policy gap between the Federal Reserve and the European Central Bank, as well as other central banks. This could cause major currency pairs such as EUR/USD to break out of their tightest range in years.
Following the US election, most banks have revised their forecasts for the EUR/USD pair, now expecting the exchange rate to approach parity. "We would expect Trump’s likely policies to create greater room for macro-economic divergence, which would lead to bigger FX moves," Dominic Bunning, head of G-10 strategy at Nomura, noted.
Market predictions of a stronger dollar under Trump's administration are also gaining momentum. Experts note that the correlation between the greenback and volatility is most pronounced when the US dollar is in high demand.
Recent market activity has focused on positioning against the US dollar, particularly with the euro, Australian dollar, and yen. Traders at UBS Group AG also report growing interest in betting on a weaker Chinese yuan.
Thus, global markets are expected to face significant volatility during Trump’s second presidential term. With the Republicans controlling both the House of Representatives and the Senate, it is anticipated that the new president’s policies will be swift and decisive. According to currency analysts at UBS, the coming year will be "a year of volatility and uncertainty." However, the bank remains cautious in predicting the specific changes that may occur under Trump’s administration, noting that there are "so many crosscurrents."
