As the 2024 US presidential election lies just five months away, Commerzbank AG Head of FX Research Ulrich Leuchtmann joins Catalysts to discuss how markets are preparing for the historic face-off.

Leuchtmann explains that when Donald Trump was elected in 2016, the dollar became stronger. However, he warns, "This all could be ruined if Trump in any way would materially hamper the Fed's independence. And we all know we have seen plans going into this direction." He notes that if the market is pricing in this risk, "then it certainly would be US dollar negative."

He adds, "the most important part from the FX market perspective is Fed's independence. Will they run an interest rate policy which is mainly targeted on containing inflation risks? And this is something which would be good for the dollar, but on the other hand, if the Fed would be more political under a new chair, then this might be problematic and this might then cause US dollar weakness."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

Well, I'm curious when you talk about crisis time.

Uh, what you think in terms of what we might be seeing here domestically?

Obviously, we are heading for a potential election.

It does an actual election, rather.

But investors seem split on what a potential trump presidency might mean, particularly for the dollar.

So I'm curious from your perspective.

What do you think potential Trump presidency could mean for the dollar?

Well, it's a margin.

I think most.

Most of the market participants rightfully remember what happened last time in 2016 when Trump became president.

And this was positive for the US dollar for a lot of reasons.

Partly because tariffs are something which is good for the US dollar, partly for other reasons.

But I think this is therefore therefore probably the likely scenario a little bit of US dollar strength.

But the point is, this all could be ruined if trump in any way would materially hamper the Fed's independence.

And we we all know we have seen seen, uh uh, plans, uh, going into this direction.

Therefore, we all don't know if this will become reality.

But if if the market is pricing in this kind of risk, then it certainly would be US dollar negative or talk to us a little bit more about what you were just saying about fed dependence or independence.

I miss that CC.

Can you just restate that exactly what that ultimately means?

Then you were saying to the dollar well last time, Uh, Trump, during his first pres presidency, was quite critical about the F, but it only was was words he was was uttering.

He he nominated a very conventional chairman with with Powell.

But next time, you cannot be sure that will be the same.

And if it would be different if it would be a much more unconventional chair who would replace power during Trump's next uh uh, potential term, then would be something different.

Uh, the most important part from the fixed market perspective is fed independence.

Will they run a interest rate policy which is mainly targeted on, um, containing inflation risks?

And this is something which would be good for the dollar, but on the other.

And if the Fed would be more political under a new chair, then this might be problematic, and this might then cause US dollar weakness So it's all from my point of view.

Depends on Trump's stance towards the Federal Reserve.

It's a great point there.

Lichterman.

Thanks so much for joining us here today on Yahoo Finance Commerce Bank's head of FX research.

Thanks, Laurie.

Thank you.