Impact of Donald Trump’s Victory on Global Currencies and India’s Position
Following Donald Trump’s victory in the U.S. presidential elections, global currencies are depreciating against the US dollar. This impact is particularly strong on emerging markets (EM), with many Asian countries being hard hit. However, India is in a somewhat better position due to its lower dependency on trade with China.
India’s Trade Position
According to a report by Emkay, India has the smallest exports-to-GDP ratio and the lowest share of exports directed towards China among its EM peers. This makes India less vulnerable to fluctuations in Chinese demand. The report states, “India is relatively better placed on China trade linkages vs EM Asian peers, having both the smallest exports/GDP ratio and the smallest share of exports going to China.”
Potential Risks
Despite this, India’s trade links with China and the broader Asian region have grown significantly over the past decade. Therefore, India is not completely shielded from potential “second-round” effects if China’s economy slows further. A weakening yuan (CNY) and other Asian currencies could put downward pressure on the Indian rupee (INR).
FX Wars and Global Volatility
The report warns of a major risk on the horizon, termed “FX wars.” As China adapts to a new export model focused on high-end manufacturing, it may keep its currency low to remain competitive. This could spark global volatility in foreign exchange (FX) markets over the coming years. “We fear the FX wars would be the biggest asset-class risk that could unfold over the coming years,” the report states.
US Dollar Strength
The strengthening of the US dollar, partly due to a shift in U.S. Federal Reserve policy, adds to the challenges in the global currency market. The dollar has gained support from election-focused sentiment and a strategic rethink by the Fed following a 50-basis-point rate cut in September. With positive U.S. economic data, the dollar has become more attractive to investors.
Despite the short-term support from Trump’s victory, the global currency market remains complex, especially as Asian countries face economic pressures and currency adjustments. The risks of an intensifying FX war highlight the need for caution in financial markets as the global economy navigates these shifting trade and currency dynamics.
Doubts Revealed
Donald Trump -: Donald Trump is a businessman and was the 45th President of the United States. He won the presidential election in 2016.
Global currencies -: Global currencies are the different types of money used in countries around the world, like the Indian Rupee, US Dollar, and Euro.
Depreciating -: Depreciating means losing value. When a currency depreciates, it means you can buy less with it compared to before.
US dollar -: The US dollar is the official currency of the United States and is often used in international trade.
Emerging markets -: Emerging markets are countries that are growing economically but are not as developed as countries like the US or UK. India is considered an emerging market.
Trade dependency -: Trade dependency refers to how much a country relies on buying and selling goods with other countries to support its economy.
FX wars -: FX wars, or currency wars, happen when countries try to make their currencies cheaper to boost exports, which can lead to economic problems globally.
Federal Reserve -: The Federal Reserve is the central bank of the United States, which helps manage the country’s money supply and interest rates.
Volatility -: Volatility means a lot of ups and downs or changes. In finance, it refers to how much the value of something, like a currency, can change quickly.
