Alin Latu, Country Manager Romania and Hungary at iBanFirst provides insights into dollar predictions and their impact on Romanian companies engaged in international trade.

Despite Trump's announced intention to devalue the dollar, the market is unanimous in expecting an appreciation of the US dollar in the event of the Republican's return to the White House. Why such certainty?

Customs duties are the foundation of Donald Trump's economic thinking and transactional approach to international affairs. However, theory and facts show that customs duties lead to currency appreciation. Regarding imports and their effects, two elements may contribute to a stronger dollar this year and in 2025.

Protectionism rhymes with strong currency

First, studies show that to counter imported inflation, the central bank must raise its rates. For now, this is unlikely for the US Federal Reserve (Fed) as it is about to begin its rate-cutting cycle very soon.

Second, customs duties cause a decrease in American import volumes, leading to lower demand for foreign currencies compared to the US dollar, thus strengthening the latter. This mechanism could come into play quickly next year.

The dollar is the modern Grail

But that's not all! The dollar is the world's reserve currency, creating structural demand from investors, institutions, companies, and central banks. This privileged status is particularly backed by the military power of the United States. A 2023 Fed study shows that three-quarters of US dollar reserves are held by countries with strong military ties to the US.

Commodities are priced in USD. Global trade is invoiced in USD. Global supply chains are financed in USD. The world wants and needs the dollar! This is why there are enormous offshore markets for US dollar debt securities, called eurodollars.

All attempts to reduce the dollar's influence have so far failed. Proof: the euro. At its launch, the single currency aimed to compete with the dollar. It was in vain. We are not witnessing the de-dollarization of the world (except for Russia and, to a lesser extent, China) but a de-euroization—a reduction in the euro's share in international exchanges according to the latest Swift data. The dollar-king is not dead.

What could Trump do to depreciate the dollar?

Let's suppose, however, that Trump really wants to see the dollar depreciate structurally. His only option would be to initiate an action that truly threatens the greenback's reserve status. This goes far beyond challenging the Fed's independence—which does not seem to be an issue for the Republican candidate.

For example, to let the deficit spiral, which might worry some investors. But again, it's insufficient to raise doubts about the dollar's solidity. Creativity would be required if Trump truly wants to succeed. If this were to happen, it would be a major problem for financial markets—especially since there is no clear monetary alternative at present (the yuan is not an option) and a monetary agreement similar to that of the 1980s seems unlikely. The good news is that this scenario is unlikely. With Trump, it is always necessary to distinguish between words and actions.

„We believe, along with the majority of the market, that a Trump presidency would benefit the dollar. We estimate that the dollar index could increase by 10% over five years—thus reinforcing the overvaluation of the US currency compared to its main counterparts. In the event of a Kamala Harris victory, the dollar should remain strong, though to a lesser extent than with a Trump presidency, primarily due to the expected outperformance of the US economy relative to the rest of the world,” states Alin Latu.

A stronger US dollar can have both positive and negative effects on Romanian companies engaged in international trade:

Positive impact

The rise of the dollar can benefit Romanian trading companies by making their exports more competitive. When the dollar strengthens, the local currency, the Romanian leu, tends to weaken in comparison. This exchange rate dynamic means that Romanian goods and services become cheaper for foreign buyers using dollars, potentially boosting demand for Romanian exports. Increased export activity can lead to higher revenues and expanded market reach for these companies. Additionally, firms dealing in dollar-denominated transactions might find their international trade dealings more profitable due to favorable exchange rates.

Negative impact

Conversely, the rising dollar can also present challenges for Romanian trading companies, particularly those reliant on importing goods and services priced in dollars. A stronger dollar makes these imports more expensive, increasing the cost. This can squeeze profit margins, especially for companies unable to pass on the higher costs to consumers. Increased import costs can reduce competitiveness and hinder the growth potential of businesses heavily dependent on international supply chains.