(Jan 30): Currency traders are increasingly hedging against any turmoil stirred by policies expected under a potential Donald Trump presidency.

In the options market, demand for insurance against swings in the euro over the coming year has been rising ever since Trump won the Republican nomination in Iowa earlier this month. At the same time, a barometer of market positioning and sentiment has jumped in favour of the dollar, the world’s preferred safe-haven currency.

The moves follow a report in the Washington Post last week that Trump privately proposed a flat 60% tariff on China if he wins the presidential election in November, a reminder of the trade and economic policies that sent shock waves through markets when he took office in 2017.

It’s also a sign markets are less driven lately by the interest rate trajectory for the Federal Reserve and the European Central Bank, and more with concern over new geopolitical rifts. The US is already juggling the war in Ukraine with the prospect of a wider conflict in the Middle East.

ECB president Christine Lagarde on Tuesday voiced more concern about a Trump presidency, saying in an interview with CNN that Europe needs to brace for potential tariffs and “harsh decisions.”

Another dash for safety risks putting further pressure on the common currency in particular, which is down 2% this month, on track for its worst month since September. Some analysts point to Trump’s opposition to further aid for Ukraine, or even the risk that he pulls the US out of Nato altogether.

“The key driver of a stronger dollar this year is the likely pricing of a higher safe-haven premium on the back of the US elections,” said George Saravelos global head of FX research at Deutsche Bank, who forecasts the euro will fall against the dollar to US$1.05 from around US$1.08 currently.

Until now, speculation about when the Fed and ECB could start cutting interest rates has been cited as the main driver across markets globally, with the prospect of earlier and deeper reductions in Europe pushing the dollar higher.

But market attention is turning to a potential re-run of Trump’s foreign policy and trade priorities which would be “materially positive for the dollar,” said Saravelos.

Market shock

The S&P 500 Index rallied by more than 60% during Trump’s presidency, spurred initially by aggressive tax cuts and then by the response to the pandemic. The greenback took a hit on aggregate, dropping to a three-year low amid geopolitical concerns, only to rally to a record high in 2020.

Of course, there’s no guarantee things will all play out the same way again, which supports the case for buying volatility exposure.

“Indeed, if Trump pushes for pro-cyclical fiscal deficit expansion again and tries to appoint a more staunchly dovish replacement for Powell, that hardly seems like a recipe for dollar strength,” said Erik Nelson senior macro strategist at Wells Fargo. So the “right” playbook for a Trump presidency might look different this time around.”

Still, “Europe could well be the target of some tariff action,” Nelson said. “Markets are understandably nervous.”