(Bloomberg) -- Goldman Sachs Group Inc. said the euro could drop as much as 10% versus the dollar if Donald Trump and the Republicans win next month’s US elections and enact high global tariffs and generous domestic tax cuts.
The bank already believes that an outperforming US economy and relatively high rates will keep the dollar strong, and it sees a risk that strength in the greenback could last even longer than its forecasts if next month’s vote results in “much higher” tariffs. It also said the yuan could fall 12% under that scenario.
Investors have been ploughing into the dollar ahead of the presidential vote on Nov. 5, emboldened by solid US earnings and growing speculation that the Federal Reserve will be less aggressive in cutting interest rates. While Goldman’s base case is still for the euro and the yuan to rebound from current levels by the end of the year, it says a slump in both currencies can’t be ruled out depending on the outcome of the vote.
“The approaching US election could change this big picture in a number of ways, but we continue to think the risks around different policy outcomes are also skewed towards more dollar strength,” said Michael Cahill, foreign-exchange analyst at Goldman in London. This was mainly due to the possibility of significantly higher tariffs, he said, adding that such restrictions would shift relative terms of trade and create divergent policy impulses in the dollar’s favor.
While the race remains close, strategists see a Trump victory and Republican sweep of Congress adding to its rally, as Trump has threatened to slap tariffs on China, Mexico and other countries, which would likely crank up inflation and keep US rates high.
Different levels of tariffs on various global imports would lead to diverging monetary policy implications for the US and Europe which “could weaken the euro by about 3%,” he said, knocking the euro to around $1.05 from $1.08 currently.
Euro Outlook
Cahill said that the euro could depreciate “closer to 10%” if Washington slaps 20% tariffs on China and 10% levies on other countries. That scenario would push the euro down below parity to around 0.97, a level last seen in late 2022. But for now, Goldman is sticking with its forecast for the euro to end the year at $1.10, and rise to $1.15 in 12 months’ time.
Various tariffs on Chinese products could send the yuan to 7.4 per dollar, its weakest according to data compiled by Bloomberg going back to 2010. An analysis of the former president’s trade policy between 2018 and 2019 shows the Chinese currency depreciated 0.7% versus the dollar for each $10 billion in implied tariff revenue, the bank said.
In a scenario under which Trump imposes 60% blanket tariffs on Chinese imports, the yuan could drop to 8 per dollar, he added.
Cahill’s calls exceed even the strongest forecast for the dollar to gain to 7.25 by the end of 2025, according to a Bloomberg poll, but he said that “it’s not likely policymakers would actually follow this path.”
Goldman sees downside risks to the dollar if China stimulus has a bigger influence on rebalancing global growth than economists expect.
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