'Trump Trade' Wins, Asia Loses As Risk Factors Surge

The financial risks could be even greater. One is that a dollar rally that's already unnerved Asia will get a second wind. The dollar's wrecking ball tendencies have been shaking up global markets for years. It has lured outsized waves of global capital westward, disadvantaging emerging-market economies in particular.

The problem, explains Tom Dunleavy, a partner at MV Capital, is that emerging markets“rely heavily on commodities and have debt in dollars.” Oil as well as most trade and debt are still priced in dollars. And, he notes“the denominator of everything is going up.”

The more crowded a continued-dollar-strength trade gets, regardless of the questionable logic behind it, the bigger the global fallout when disappointed punters run for the exits. And Trump could serve up many such scenarios.

Though Trump's tariffs get the headlines, Asia is equally concerned about what his second presidency might mean for the Federal Reserve, the protector of the globe's top reserve currency.

Trump put the moves on the Fed during his 2017-2021 stint in the White House. He went after his hand-picked Fed chairman early and often - and Jerome Powell buckled. In 2019, Powell bowed to relentless pressure from Trump , who even threatened to fire him.

That's how the globe's most potent monetary authority added liquidity to a booming economy that didn't need new stimulants. Trump's Fed meddling set the stage for the post-Covid-19 price surge to come. It also tarnished the Fed's credibility in global markets.

For Asia, Trump's Fed policies are especially worrisome. The region's central banks are sitting on the biggest stockpiles of US Treasury securities. Japan alone holds $1.1 trillion of US debt; China $770 billion.

Together, Asia's largest holders of dollars own about $3 trillion worth. Trump 2.0 would put at risk vast amounts of Asian state wealth if his fiscal policies push Washington's debt far above today's US$35 trillion.

Not to mention the ways China might retaliate, leading to cycle of tit-for-tat trade curbs. Or might Beijing move to dump large blocks of Treasuries to hit back at the Trump 2.0 gang?

Or what if Trump's designs on altering the Fed's mandate come to pass? A key plank of the“Project 2025” strategy that the Heritage Foundation devised for a second Trump term is watering down Fed independence.

In a recent interview with Bloomberg, Trump took shots at Powell and his fellow policymakers.“I think it's the greatest job in government,” Trump said.“You show up to the office once a month and you say, 'Let's say flip a coin' and everybody talks about you like you're a god.”

Trump also argues that the White House has every right to pressure the Fed to do its bidding.

In August Trump said,“The Federal Reserve is a very interesting thing and it's sort of gotten it wrong a lot.” He went on to say that“I feel the president should have at least [some] say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”

This could put the Fed's economic role closer to that of the People's Bank of China.

To be sure, the concept of central bank independence has been muddied. Take the Bank of Japan , which has held interest rates at or near zero for 25 years. What truly autonomous central bank would do that?

Yet the Fed is a different story. The dollar is the linchpin of global finance and trade. Trump talked often during his first term about engineering a weaker dollar to gain trade advantage. Any policy pivot that undermines trust in the dollar and US government debt makes the entire global system shakier.

A weaker dollar could fan inflation. That, on top of Trump's tariffs, could put the Fed in a very tough spot as Trump looks over Powell's shoulder. Economists are frantically debating how all this might shake out.

“On the US dollar, Trump wants to revitalize US manufacturing and exports,” says Will Denyer, an analyst at Gavekal Research.“Recognizing that US dollar strength is an impediment to these goals, he may seek to manipulate the dollar lower.”

However, Denyer says,“he has few good options. Using capital controls to discourage foreign inflows is tough, given the dependence of the US government and companies on foreign capital today. And leaning on the Federal Reserve to cut interest rates will not be easy in the near term, if Fed chair Jay Powell sticks around until the end of his term in May 2026.”

Denyer adds that“Trump could use the threat of tariffs as a negotiating tool in an attempt to get other countries to revalue their currencies. However, in the absence of broader economic policy shifts, it is doubtful whether currency intervention – even multilateral intervention – will materially weaken the US dollar.”

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This, Denyer concludes,“will leave Trump to hope that continued disinflation allows the Fed to cut rates, weakening the US dollar. However, there is a sizable probability that loose fiscal policy and sticky inflation will keep monetary policy relatively tight, supporting the US dollar and confounding Trump's aim of weakening the currency.”

Another wild card: whether Trump might renew his flirtation with defaulting on US debt. In 2016, he told CNBC that“I would borrow, knowing that if the economy crashed you could make a deal. And if the economy was good, it was good. So, therefore, you can't lose.”

While president the first time, Trump considered canceling debt held by Beijing amid trade tensions. With the US national debt twice the size of Chinese gross domestic product, it's easy to see how that would make the 2008“Lehman shock” seem quaint by comparison.

The specter of geopolitical conflict is also weighing on Asian assets. One is what a Trump 2.0 foreign policy team might mean for Taiwan.

Trump's return is music to Vladimir Putin's ears, giving the Russian leader greater scope to commandeer Ukraine once and for all. Compared with US President Joe Biden's administration, Trump also seems less likely to come to Taipei's defense if China moved against the island of 23 million people .

The direction of US policies in the Middle East will also keep Asia investors guessing. Trump, for example, might give Israeli Prime Minister Benjamin Netanyahu greater scope to pursue the war in Gaza. He's also likely to tighten sanctions on Iran, adding fresh uncertainty to oil supply dynamics and, by extension, energy prices.

“Conceptually, the impact of a potential second Trump term on oil prices is ambiguous,” says commodity researcher Yulia Zhestkova Grigsby at Goldman Sachs.

Other imponderables will worry Asian governments as Trump 2.0 takes the reins. Japan and Korea fear that transactional Trump might pursue a“grand bargain” trade deal with Xi that leaves other top Asia economies looking in from the outside.

All that's clear, though, is that there will be fewer guardrails or inhibitions as Trump seeks to“make America great again” at Asia's expense.

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