Central bankers the world over are gauging whether their worst fears over Donald Trump will come to pass following his resounding return to the US presidency.
Trump has promised levies on US imports that would upend global trade, tax cuts that would further stretch the federal budget and deportations that could shrink the pool of cheap labor.
That poses two main risks: Slower economic expansion around the world and faster inflation at home that would make the Federal Reserve less willing to lower interest rates.
The upshot could be a stronger dollar and reduced scope for developing nations to ease their own monetary conditions.
“If a jurisdiction as important as the US imposes tariffs of 60% to any other important jurisdictions – let’s speak about China – I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,” European Central Bank Vice President Luis de Guindos said Wednesday in London.
In Europe, Goldman Sachs penciled in an additional ECB rate cut, citing softer economic growth as a result of Trump’s policies. Faced with massive tariffs, expectations also built that China may loosen more than it had planned.
Not all regions have that luxury, however. Emerging markets, eager to support their currencies, may get more hawkish.
Monetary officials got a glimpse of what may be to come on Wednesday.
The dollar posted its biggest gain against major currencies since 2020, while a surge in Treasury yields prompted some authorities in Asia to pledge steps to protect their currencies.
In China, which has been firmly in Trump’s tariff cross hairs, state-owned banks sold dollars to support the yuan, which weakened more than 1%, according to traders who didn’t want to be identified.
