US Dollar Surge from 'Trump Trade': UBS Recommends Selling Amid Long-Term Uncertainty

US Dollar Gains Support from the Return of the "Trump Trade," but UBS Warns Stronger Rally Should Be Sold

The US dollar has recently found support due to the resurgence of the "Trump Trade" phenomenon, following the increasing likelihood of Republican candidate Donald Trump returning to the White House. However, UBS, a major financial institution, has issued a warning that a stronger rally in the greenback might be a selling opportunity, as they do not see Trump as a long-term positive factor for the US dollar.

In a report released on Friday, UBS stated, “We continue to anticipate dollar strength if Trump is elected. However, from a medium-term perspective, we do not consider Trump as beneficial for the USD, which is why we recommend selling into any significant dollar rally.”

This statement comes less than two weeks before the US presidential election, where despite Trump gaining momentum in recent weeks and now holding a slight lead over Vice President Kamala Harris in some polls, the situation remains highly uncertain and difficult to predict.

The recent rise in the dollar’s value has been largely driven by market expectations of a greater possibility of a Trump victory, with the greenback seen as one of the key assets in trades associated with Trump's presidency, becoming increasingly favored.

UBS also highlighted that the dollar’s boost from the "Trump Trade" might be temporary. They predict that the euro-dollar exchange rate will move toward 1.16 by 2025, indicating limited upside potential for the greenback in the longer term.

The "Trump Trade" Phenomenon and Its Impact on the US Dollar

The term "Trump Trade" refers to market trends influenced by the policies and expected actions of Donald Trump, particularly during his presidency from 2017 to 2021. In that period, the US dollar gained significantly in value due to Trump’s aggressive stance on tax cuts, deregulation, and increased government spending, all of which were perceived to boost economic growth. Investors flocked to the dollar, seeing the US economy as a place of strength.

In 2024, with Trump showing renewed potential for a political comeback, markets have once again started to position themselves in anticipation of a possible repeat of the "Trump Trade." Investors are betting on Trump's policies, which they expect to stimulate economic growth and strengthen the dollar, just as they did during his previous administration.

However, UBS believes that while the initial reaction may be positive for the dollar, the longer-term outlook is far less certain. Their concern lies in the unpredictable nature of Trump’s economic policies, his confrontational stance on trade, and his approach to monetary policy, which could all create headwinds for the US dollar over time.

UBS’s Medium-Term Concerns about Trump and the US Dollar

UBS’s analysis reflects skepticism about Trump’s economic policies in the medium to long term. According to UBS, although the dollar could see an immediate boost if Trump wins the 2024 election, there are several factors that might limit the greenback's strength in the years following his potential return to office.

One of UBS’s key concerns is Trump’s historical penchant for protectionist trade policies. During his first term, Trump’s tariffs on major trading partners, particularly China, created significant disruptions in global trade and caused uncertainty in financial markets. While the tariffs may have supported certain domestic industries, they also sparked retaliatory measures from other countries, which hurt American exporters and strained international economic relationships.

A second concern is Trump’s often-critical stance on the Federal Reserve. In the past, Trump publicly pressured the central bank to adopt more accommodative monetary policies, including lowering interest rates. UBS worries that if Trump were to return to power, his influence on the Fed could lead to a looser monetary policy stance, which might weaken the dollar over time, especially if inflationary pressures remain elevated.

UBS also pointed to Trump’s tax policies, which could exacerbate the federal budget deficit. While tax cuts could boost growth in the short term, UBS believes that without accompanying spending cuts or revenue increases, the growing deficit could undermine confidence in the US dollar, particularly if investors become concerned about the long-term fiscal health of the United States.

Dollar Rally: A Selling Opportunity

Given these concerns, UBS is advising caution for investors eyeing the recent dollar rally. While the greenback could see gains in the short term due to market excitement over Trump's potential victory, UBS recommends that investors sell into any significant rally rather than holding onto long-term bullish positions.

The rationale behind this recommendation is that UBS does not see Trump’s policies as structurally beneficial to the US dollar. In particular, they believe that the uncertainty surrounding trade policies, fiscal discipline, and monetary policy under another Trump presidency could weigh on the dollar in the years to come.

UBS’s recommendation reflects a broader view in the financial markets that while short-term price movements can be influenced by political developments, long-term currency trends are driven by fundamentals like trade balances, inflation expectations, and central bank policies. In their view, Trump’s potential return to the presidency introduces too many uncertainties for investors to confidently hold onto long-term dollar positions.

Long-Term Forecast: Limited Upside for the US Dollar

Looking beyond the immediate political impact, UBS has outlined a more cautious long-term forecast for the US dollar. They predict that the euro-dollar exchange rate will move toward 1.16 by 2025, suggesting limited upside for the greenback in the coming years.

This forecast is based on several factors, including expectations of a narrowing interest rate differential between the US and other major economies. While the Federal Reserve has been raising interest rates in response to inflation, other central banks, particularly the European Central Bank, are also tightening monetary policy. As the interest rate gap between the US and Europe narrows, the relative attractiveness of the US dollar may diminish.

UBS also expects that the global economy will continue to recover from the disruptions caused by the COVID-19 pandemic. As economic growth in other regions, particularly the Eurozone and Asia, picks up, demand for US dollars could weaken, as investors seek opportunities in other currencies and markets.

Conclusion: A Cautious Approach to the Dollar’s Rally

In summary, the recent rise of the US dollar, driven by the return of the "Trump Trade" phenomenon, has caught the attention of investors. However, UBS has issued a warning that this rally might not be sustainable in the long run. While a Trump victory could initially boost the dollar, UBS believes that the longer-term outlook is clouded by uncertainties surrounding Trump’s economic policies, including his stance on trade, monetary policy, and fiscal discipline.

Investors looking to capitalize on the recent dollar strength should be mindful of UBS’s recommendation to sell into any significant rallies, as they foresee limited upside for the greenback in the medium to long term. With predictions that the euro-dollar exchange rate could reach 1.16 by 2025, UBS’s cautious approach underscores the importance of focusing on economic fundamentals rather than short-term political developments when assessing currency trends.