Image © Adobe Images
The Dollar has liked Donald Trump's top picks so far, but his choice for Treasury Secretary could matter the most.
"The market's focus is now on Trump's choice of Treasury secretary," says Kathleen Brooks, research director at XTB. "In recent days, this has shifted to a joint headship between Kevin Warsh and Scott Bessent."
According to Brooks, Bessent is an interesting choice; "the hedge fund manager has been a proponent of free trade in the past. Thus, the fact that Trump is considering him for this position could mean that fears about Trump's tariffs are overdone."
If this is the case, the Dollar would potentially unwind some of its recent gains, allowing the likes of GBP/USD and EUR/USD to find a short-term base.
"The battle for U.S. Treasury Secretary is likely to remain a driver of the USD," says Luis Hertado, FX strategist at CIBC.
Warsh served on the Federal Reserve Board of Governors from 2006 to 2011 and has institutional experience. "With hope that Warsh gets the nod, there is less worry about how the Fed and Treasury work together to help fund the government," says Bob Savage, Head of Markets Strategy and Insights at BNY Mellon.
Hertado says another name in the ring is Howard Lutnick, whose improving odds have had a positive intraday correlation with moves in the USD, "as Lutnick is seen as more pro-tariff than the other candidates."
The Dollar rose in reaction to the 'red sweep' that the U.S. electorate delivered on November 05, as investors expect Trump to implement significant import duties on incoming goods. This is inflationary, which could bolster the Dollar and disadvantage international economies, such as those of the Eurozone and China.
Markets are now focussed on the shape of President-elect Trump's picks for key positions in government as they signal how policy might evolve.
"We maintain dollar longs in anticipation of clarity on U.S. policy soon, including the realisation of tariff risks and more fleshed out fiscal ambitions," says Patrick R Locke, an analyst at JP Morgan
The Dollar rallied last week after initial picks for Trump's cabinet included the appointment of trade 'hawks' such as Marco Rubio to the Secretary of State and Mike Waltz as National Security Advisor.
But no position is more important for international trade than the Treasury Secretary.
Bessent is the founder of capital management firm Key Square and wants the U.S. dollar to remain the world’s reserve currency and use tariffs as a negotiating tactic.
Should the new administration negotiate on tariffs, then we move away from blanket tariffs, and the odds of the most severe tariff scenarios fade.
Elon Musk, now a close confidant of Trump, on Sunday made clear his support for Lutnick.
Brooks points out there might be another deciding factor behind how far Trump decides to go on tariffs: the stock market.
Trump's first term in office was defined by his benchmarking of success via rallying stock markets. Anything that jeopardises this won't be tolerated.
"Free trade and international markets are vital for the biggest companies on the S&P 500. Without their robust earnings performance, the S&P 500 could sag. If Trump does choose a Treasury Secretary who has a bias for free trade, this could ease global fears about the extent of Trump’s tariffs plans once he takes office in January," says Brooks.
A lot has gone right for the Dollar over recent weeks, and we wonder if the key appointment of the Treasury Secretary and any hints of a winding down of tariff policy will upend the rally.