Goldman Sachs has issued a stark warning regarding the euro’s future, predicting a potential 10% drop if Donald Trump wins the upcoming U.S. presidential election on November 5. The former president’s aggressive economic policies, such as imposing widespread tariffs and implementing domestic tax cuts, could severely impact Europe, one of the U.S.’s major trading partners, according to Goldman’s analysis.

Trump’s Radical Economic Policies and Their Impact

The current race between Donald Trump and Democratic Vice President Kamala Harris is tight, but Goldman Sachs emphasizes that Trump’s potential return to power would have significant economic consequences. If Republicans win both the presidency and Congress, they are expected to push for a series of economic measures that would serve as a stimulus for the U.S. economy but could harm Europe.

Goldman Sachs analyst Michael Cahill outlined a scenario where Trump could implement a 10% tariff on all imports, along with a 20% levy on Chinese products. This, combined with domestic tax cuts, would likely cause the U.S. dollar to strengthen sharply, leading to a substantial decline in the euro’s value. Cahill suggests that the euro could fall by 8% to 10%, potentially dropping below $1, a level it hasn’t seen since November 2022. As of now, the euro is trading at approximately $1.08.

The Dollar’s Strength and Inflation Concerns

These proposed policies could lead to a notable rise in inflation within the U.S. A combination of tariffs and tax cuts would drive inflation higher, which in turn would prompt the Federal Reserve to raise interest rates significantly. Higher interest rates would make the dollar more appealing to investors, creating a scenario where the euro would weaken considerably against the dollar.

Cahill emphasized that a “Republican sweep” in the U.S. elections would be the primary driver of this currency movement, as it would pave the way for higher tariffs and aggressive economic reforms. In contrast, a narrower trade war scenario, where Trump focuses solely on China, would likely lead to a smaller euro drop, around 3%, according to Cahill’s projections.

Broader Trade Implications and Investor Sentiment

Trump’s trade policies during his previous administration included the imposition of tariffs on goods from China and Europe, leading to heightened trade tensions. His approach to “America First” economics may repeat if he wins the election, potentially reigniting trade wars that would shake global markets.

Goldman Sachs pointed out that investors are already positioning themselves in anticipation of higher tariffs, as reflected in the euro’s recent performance. The currency has fallen 2.7% so far in October, as the U.S. economy continues to show resilience compared to Europe. Investors appear to be betting on the possibility of a Trump victory and the subsequent imposition of tariffs, which would hurt European exports to the U.S. and China.

A Democratic Victory Would Mean Different Outcomes

On the other hand, Goldman Sachs also explored the potential outcomes of a Democratic win. If Vice President Kamala Harris were to win the presidency, or if the U.S. government remained divided, Goldman anticipates that the dollar might initially weaken as markets adjust to the possibility of fewer drastic economic changes, particularly in the realm of tariffs.

Cahill noted that the markets would likely reprice the prospect of reduced tariffs under a Democratic government, which could provide some relief to the euro. A less aggressive trade policy would also ease the inflationary pressures expected under a Trump-led administration.

As the U.S. presidential election approaches, the global financial markets are closely watching for potential economic shifts. Goldman Sachs’ predictions suggest that a Trump victory could have a profound impact on the euro, with his proposed tariffs and tax cuts likely driving the dollar higher while pushing the euro lower. Europe, a key trading partner of the U.S., could be caught in the crossfire of renewed trade wars, which would further strain its economy. Meanwhile, a Democratic victory could see a more moderate approach to trade, possibly providing some stability to the euro. The stakes are high, and the outcome of the election could reshape global trade dynamics for years to come.

(Adapted from Reuters.com)

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