Analysts expect Trump’s proposed policies to lead to a rise in the dollar and Treasury yields. How so?
Investors fear that Dollar rise US President-elect Donald Trump’s second term could lead to a decline in emerging market bond yields.
Investors’ fears of a rising dollar prompted them to withdraw about $5 billion from funds investing in emerging market bonds denominated in dollars and local currencies during the first half of November, according to the Financial Times, citing data from the Bank of JPMorgan“.
Dollar expected to rise under Trump
The report revealed that expectations Dollar rises under Trump, also prompting investors to worry about potential outflows that a strong dollar could lead to.
The report indicated that developed countries are witnessing a long period of high interest rates, which makes them a more attractive destination for funds that would have been directed to emerging markets in other circumstances, according to the JP Morgan report.
Outflows from emerging markets
JPMorgan also released data on net outflows in emerging markets over the past few years.
On November 8, emerging market bonds recorded net outflows of $3.2 billion, the largest outflow in about two years.
JP Morgan reported that investors expected emerging market assets to come under pressure from Trump’s policies.
During 2024, total outflows from emerging market bonds recorded $20 billion, which is less than $31 billion last year, and $90 billion in 2022.
Trump trades and the dollar rises
Investors continue to shift their focus to the U.S. dollar, Wall Street stocks and the so-called “Trump trade,” as analysts expect proposed policies such as tax cuts and tariffs to fuel inflation, helping to lift the dollar and Treasury yields.
Ten-year Treasury yields have risen from 4.29% to 4.39% since Trump won the election, while the dollar has risen against other currencies.
Local Currencies Threaten Bond Yields
Investors and analysts believe that US tariffs may put more pressure on emerging markets’ local currencies due to lower demand for their exports, which may reduce returns on local currency bonds, according to the American newspaper.
“All of this will be negative for emerging markets,” Paul McNamara, head of emerging markets debt at GAM, told the newspaper.
The dollar’s rise is currently crushing other currencies, since it began.US Central Bank “It cut interest rates aggressively in September.
It is worth noting that the US Federal Reserve also cut interest rates in November, with economists expecting further rate cuts until mid-2025.
Dollar strength is not guaranteed
But the strength of the US dollar under Trump is not certain, as the new administration’s plans for “fiscal, monetary, trade and exchange rate outcomes” lack alignment, according to Karthik Sankaran, a senior fellow at the Quincy Institute.
Sankaran added that the economic policies of the next administration may, over time, contribute to a weaker dollar, but this change may come too late for emerging markets to avoid the repercussions of expected exchange rate pressures.
