Dollar Rises and Asian Stocks Fluctuate Amid Trump’s Potential Election Win

Dollar Rises and Asian Stocks Fluctuate Amid Trump’s Potential Election Win, The US dollar recorded a significant rise, while Asian stocks experienced narrow fluctuations as traders evaluated the potential for Donald Trump to win another presidential term following his recent debate with Joe Biden.

Mixed Performance for Asian Stocks

Stock indices in Australia and South Korea declined, while those in Japan and Hong Kong saw gains. This coincided with the US dollar rising against most of its peers in the G10 group, while 10-year Treasury yields fell after a seven basis point rise, nearing 4.5%.

Potential Implications of a Trump Victory

In this scenario, Biden called on voters to evaluate Trump after the Supreme Court's ruling potentially allowed the Republican presidential candidate to evade prosecution for his role in the January 6 Capitol riots.

Tony Sycamore, a market analyst at IG Australia, explained, "Treasury bond selling continued overnight as the market started pricing in a Trump victory, which could result in continued federal deficits and possibly higher inflation." He added, "Higher US Treasury yields will be accompanied by a stronger US dollar, both of which could pose challenges for many Asian stock markets."

Impact on Bonds and Stocks

Australian bonds saw declines as the central bank viewed keeping interest rates at their highest level in 12 years in June as "the most likely scenario." US stock futures also fell during Asian trading hours, despite Wall Street's rise on Monday, driven by gains in major tech stocks.

Pessimism in China and Optimism in Japan

In China, pessimism about the domestic economy led to increased demand for government bonds. The central bank indicated it might consider selling securities to cool the rise.

In Japan, the likelihood of raising interest rates later this month increased after a confidence index among major manufacturers showed improvement compared to three months ago. Investment bank Vanguard expects the yen to be at risk of falling to around 170 against the dollar if potential policy changes by the Bank of Japan fail to boost bond yields.

Europe and Interest Rate Expectations

In Europe, European Central Bank President Christine Lagarde noted insufficient evidence that inflationary threats had ended, reinforcing expectations that officials might pause rate cuts this month. The euro's price remained relatively unchanged after French election results suggested a lower likelihood of extreme right-wing policies.

Future Market Outlook

Following the presidential debate, Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra reassessed their pre-election assumptions. They wrote, "The key issue is that the market now has to deal with the increasing likelihood of changes in immigration and tariff policies in a slowing economy, making the market more prone to pricing in further rate cuts." They also noted that "the rising probability of a Republican sweep, with an increased focus on fiscal deficits, could put upward pressure on long-term risk premiums."

In the commodities market, oil prices remained near a two-month high amid escalating Middle East tensions and concerns about the early start of the Atlantic hurricane season. Meanwhile, gold prices showed little change.