Dollar Rises to Highest Since July as Trump Takes Lead; Implications for the Cedi
The dollar rose to its highest since July as early results of the US presidential vote indicated that Donald Trump had an edge in certain key states, boosting demand for trades that hinge on the former president’s protectionist policy vows.
The Bloomberg Dollar Spot Index rallied more than 1% amid haven demand and as traders returned to wagers seen as benefiting from low-tax and high-tariff policies under a potential Trump administration. The Republican had taken preliminary leads against Vice President Kamala Harris in Georgia and North Carolina, two key swing states, while vote counting in others was in its early stages.
The surge in the greenback sent currency peers around the world sliding, with the euro weaker by more than 1%. The yen, Australian dollar and Swiss franc also fell more than 1%, while losses in the Mexican peso hit the 2% mark.
“Dollar strength on the back of Trump odds improving in the early vote count is really hitting the Mexican peso, euro and yen,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “Thin early Asia market liquidity and excitement from early results has amplified market moves of pricing in higher Trump odds.”
The close contest has elevated volatility in markets as traders tried to gauge the potential fallout of a victory by Trump, whose tariff and tax-cut plans would roil global trade and potentially fan inflation pressures in the US.
That drove hedge funds and other traders to prepare by plowing into so-called Trump trades for much of October, elevating the dollar and dragging down others like the Mexican peso, before Harris’s strong showing in certain polls reversed some of that this week.
As of Oct. 29, hedge funds and other speculative traders positioned for a further rally in the greenback, also spurred by a demand for haven assets of the election outcome. These funds, asset managers and other speculators held some $17.8 billion in bullish dollar positions, according to Commodity Futures Trading Commission data compiled by Bloomberg.
Implications for the Cedi
A strengthening of the US dollar does not augur well for the Ghanaian cedi as it implies a depreciation of the local currency.
Statistically, a 1% appreciation of the greenback (dollar) translates into a 1.5% to 3% depreciation of the Ghanaian cedi.
A depreciation in the cedi is likely to lead to an increase in the prices of goods and services in the country and potentially reverse inflationary gains made by the country over the past five months.
Ghana’s headline inflation as of September stood at 21.5% according to the Ghana Statistical Service (GSS).
A reversal in the country’s falling inflation is likely to also lead to a hike in the monetary policy rate of the Central Bank given the positive relationship between inflation and policy rate, and the need for the Central Bank to tame rising inflation with a higher policy rate.
In September, the BoG cut its policy rate by 2% to 27%, on the back of declining headline inflation.
The Bank of Ghana’s September 2024 Summary of Economic and Financial Data report asserts that the cedi fell by 24.3% against the US dollar, 27.7% against the British pound, and 25% against the euro.
This, according to the World Bank’s October 2024 Africa Pulse Report makes the cedi one of the weakest-performing currencies in Sub-Saharan Africa (SSA) for 2024.
The World Bank report places the cedi as the fourth worst-performing currency in the region, behind South Sudan’s pound (over 60%), Ethiopia’s birr (51%), and Nigeria’s naira (over 40%).
On the interbank market, the cedi, at the close of Tuesday, November 5, 2024, was trading at GHS 16.77 to $1 per data from cedirates.com.
Potential Trump Presidency in 2025 to Put Pressure on Cedi, Says Fitch Solutions
Meanwhile, Fitch Solutions has noted that a potential Trump presidency in 2025 would most likely strengthen the US dollar, thereby exerting pressure on the Cedi and other emerging market currencies.
This, Fitch Solutions averred, would prompt the BoG to adopt a more restrictive monetary policy stance than currently anticipated.
“A potential Trump presidency in 2025 would most likely strengthen the US dollar, thereby exerting pressure on emerging market currencies, including the cedi. This would prompt the BoG to adopt a more restrictive monetary policy stance than we currently anticipate,” said Fitch Solutions.
with files from bloomberg
