Trump's Second Term Brings 'King Dollar'... Rising Concerns Over Asian Inflation and Capital Outflows

Major Central Banks' Monetary Policies Also Face a 'Dilemma'

With the expected launch of Donald Trump's second administration in January next year and the anticipated 'King Dollar' (strong dollar), concerns are growing over inflation and capital outflows in major Asian countries such as Korea, China, and Japan. It is also pointed out that major central banks that have pursued monetary easing before and after the U.S. interest rate cuts may face a dilemma in conducting monetary policy.

On the 20th (local time), the U.S. economic daily The Wall Street Journal (WSJ) reported that Trump's policies on tariff increases, tax cuts, and illegal immigration bans are expected to drive inflation, high interest rates, and a strong U.S. dollar, putting Asian central banks in a serious predicament.

The market expects that after the launch of Trump's second term, prices will rise, interest rates will increase, and the dollar's value will strengthen. First, tariff hikes and illegal immigration bans raise import prices and labor costs, stimulating inflation and potentially prolonging the Federal Reserve's (Fed) high interest rate stance. Trump's tax cut policies, including reductions in income and corporate taxes, are also factors that could expand the fiscal deficit and increase government bond issuance yields. As U.S. interest rates rise, capital flows into the U.S., further boosting the dollar's value.

WSJ forecasts that the strong dollar will increase import prices in the Asian region. In particular, rising energy and food import prices could heighten inflationary pressures. Additionally, concerns over capital outflows are expected to grow. According to U.S. investment bank JP Morgan, Asian stock markets excluding Japan have fallen by an average of 13% during periods of dollar strength since 2008. This is expected to constrain the monetary policies of major countries, including Korea, which have begun cutting interest rates in line with the recent U.S. monetary easing cycle. This means that the pace of interest rate cuts may need to slow down. In the case of the Bank of Japan (BOJ), which ended its negative interest rate policy in March and raised the benchmark rate in July, there is a possibility that interest rates will need to be raised rapidly. Although Asian central banks can prevent sharp currency depreciation through abundant foreign exchange reserves, WSJ's analysis suggests that if U.S. interest rates remain higher than those in Asia, capital outflows will be unavoidable.

In the case of China, which the U.S. is increasingly targeting, currency depreciation may accelerate further. During Trump's first administration, the U.S.-China trade war intensified, causing the yuan to depreciate by 10% against the dollar between 2018 and 2019. Trump has announced a 60% tariff on Chinese goods, leading to analyses that the yuan's depreciation could deepen further.

WSJ stated, "Currency depreciation against the dollar may help mitigate the impact of tariff increases on exports, but it also risks accelerating capital outflows," adding, "This poses a particular challenge for China, which is experiencing economic slowdown due to a housing market collapse."