Synopsis:

Credit Agricole anticipates that Trump’s second term could initially support USD strength due to expected fiscal stimulus and potentially sticky inflation from tariffs. However, by late 2025, the USD may weaken as the US growth advantage fades, the Fed’s rate cuts accumulate, and Trump’s weak-USD stance gains traction in a slower economic environment.

Key Points:

1. Lessons from Trump’s First Term:

   • Fiscal stimulus might improve chances of a US soft landing, while trade tariffs could make inflation more persistent, supporting a less dovish Fed stance.
   • Currency depreciation attempts by US trade partners in response to tariffs could lift USD further, as happened during Trump’s first term.

2. USD Strength Dynamics and the “Impossible Trinity”:

   • In Trump’s first term, attempts to talk down the USD conflicted with inflationary policies and a resilient economy, which led the Fed to adopt a hawkish stance, supporting USD gains.

3. Key Differences in 2024-2025:

   • The US economy is currently slowing, and new tariffs could intensify downside growth risks.
   • Unlike the first term, Fed easing is expected to continue despite potentially sticky inflation, especially as trading partners’ currencies are already weaker, limiting their ability to devalue competitively.

4. Long-Term USD Outlook:

   • Credit Agricole expects USD strength to persist in early 2024, but it could face declines by late 2025 as relative US growth wanes, Fed cuts increase, and Trump’s weak-USD doctrine gains impact.

Conclusion:

Credit Agricole sees initial USD support in Trump’s second term but expects USD to lose ground by 2025 as Fed cuts accumulate and US growth moderates. Near-term focus will be on US CPI, retail sales, and Fed comments for further insights on the “Trump trade.”