The Dollar, Trade Deficit, and Budget Deficit for Investors

How the U.S. Dollar, Trade Deficit, and Budget Deficit Could Shift Under Trump

The U.S. economy operates on a delicate balance, influenced by the value of the U.S. dollar, the trade deficit, and the budget deficit. Now that Donald Trump is back in office, investors should pay close attention to how his policies could shape these critical economic factors.

While many of the themes from his first term are resurfacing—such as a focus on tariffs, reshoring manufacturing, and tax cuts—the global economic landscape has changed significantly. The Federal Reserve has fought inflation with aggressive rate hikes, the national debt has grown even larger, and geopolitical tensions have intensified. All of these factors could impact the market in ways that differ from what we saw between 2017 and 2021.

The U.S. Dollar and Its Implications

The U.S. dollar plays a unique role in the global financial system. As the world’s primary reserve currency, it is used in trade, international debt, and foreign exchange reserves. When the dollar strengthens, American consumers benefit because imported goods become cheaper, but it also makes U.S. exports more expensive abroad. When the dollar weakens, the opposite happens—exports become more competitive, but Americans pay more for imported goods (which can contribute to inflation).

Trump has historically preferred a weaker dollar to support American manufacturers and exporters. His administration has indicated that this approach will continue, and recent policy announcements suggest that several key actions could put downward pressure on the dollar:

• Tariffs on imports – Trump has proposed a 10% universal tariff on all imported goods and potential 60% tariffs on Chinese goods. (This is much broader than the China-focused tariffs of his first term.)
• Increased government borrowing – If Trump expands fiscal stimulus programs, tax cuts, or defense spending, the rising deficit could weaken confidence in the dollar over time.
• Pressure on the Federal Reserve – Trump has previously criticized the Fed for keeping rates too high. If he pushes for rate cuts to boost growth, this could also weigh on the dollar.

For investors, a weaker dollar tends to favor companies that generate significant revenue overseas (such as Apple, Boeing, and Procter & Gamble), as well as commodity markets like gold and oil that often rise when the dollar weakens. However, if inflation picks up due to higher import costs, the Fed could be forced to keep rates elevated, creating potential headwinds for stocks.

The Trade Deficit and Trump’s Protectionist Stance

The trade deficit measures the difference between what the U.S. imports from other countries versus what it exports. Trump has long argued that a large trade deficit means the U.S. is being taken advantage of in global trade. However, despite his aggressive use of tariffs in his first term, the trade deficit actually grew to record highs during his presidency.

His administration sees this as unfinished business and is expected to take even stronger action this time. We could see:

• An expansion of tariffs and trade barriers – While China will remain a primary target, Trump’s new proposals indicate that tariffs could be applied to all major trading partners, including Europe, Mexico, and Japan.
• Higher costs for imported goods – If tariffs increase, American consumers and businesses that rely on foreign materials (such as auto manufacturers and electronics companies) could face higher costs. (This was one of the unintended consequences of his first tariff policies—steel and aluminum prices spiked, hurting industries that rely on them.)
• Government incentives for reshoring – Expect tax breaks and subsidies for companies that relocate manufacturing to the U.S., particularly in semiconductors, defense, and energy.

For investors, industries that rely heavily on imports—like retailers (Walmart, Target), automakers (Ford, GM), and tech manufacturers—may struggle if tariffs drive up costs. On the other hand, domestic manufacturers that benefit from trade restrictions could see growth opportunities.

The Budget Deficit: A Growing Concern for Investors

The U.S. government is currently running an $838 billion deficit in just the first four months of the fiscal year—a significant increase from previous years. The national debt has now exceeded $34 trillion, and rising interest costs on that debt are becoming a larger burden on the federal budget.

During his first term, Trump’s tax cuts contributed to rising deficits, though they were later overshadowed by pandemic-related spending. If similar fiscal policies are enacted this time, we may see:

• More tax cuts – Trump has floated the idea of additional tax reductions, particularly for individuals and corporations. While this could boost economic growth in the short term, it would likely add to the deficit.
• Increased spending on defense and infrastructure – Trump has prioritized military spending and may push for large-scale infrastructure projects, which would require additional borrowing.
• Possible cuts in social spending – To offset rising deficits, cuts could be made to programs like Medicaid, education, or foreign aid.

The biggest concern for investors is how the bond market reacts to growing deficits. If the government keeps borrowing at high levels, bond yields may rise, making Treasuries more attractive relative to stocks. This could pressure equities, especially high-growth sectors that rely on low borrowing costs.

How Investors Can Prepare

With Trump’s policies shaping the market in ways that favor some industries and challenge others, here are some key areas to watch:

• Beneficiaries of a weaker dollar – Companies with strong international sales (Apple, Microsoft, Caterpillar) could benefit if the dollar declines.
• Industries protected by tariffs and reshoring efforts – Defense stocks, energy producers, and semiconductor manufacturers may get government support.
• Gold and commodities – If the dollar weakens and inflation rises, gold and oil may become attractive hedges.
• Bonds and interest-rate sensitive sectors – Rising deficits could push bond yields higher, making fixed-income investments more attractive relative to stocks.

At the same time, investors should watch for risks in industries that rely on cheap imports (such as retail and consumer goods) and sectors that struggle with rising borrowing costs (like high-growth tech stocks).

Economic Shifts Ahead

A second Trump administration will likely bring a mix of trade protectionism, tax cuts, and fiscal expansion, but the actual market impact will depend on how these policies interact with broader economic forces. While some trends—such as a push toward reshoring and a preference for a weaker dollar—are familiar, the backdrop today is very different than in 2017.

Inflation remains a concern, debt levels are higher, and interest rates are not near zero like they were during Trump’s first term. This means investors should stay flexible and pay attention to how the Federal Reserve reacts to any fiscal changes. The key is staying informed and adjusting portfolios accordingly as policies unfold.

Investment Opportunities in a Trump-Era Economy

With major shifts in trade policy, currency strength, and government spending, certain sectors and asset classes may present strong investment opportunities, while others could face headwinds. Let’s break down potential winners and areas to be cautious about.

1. Stocks That Could Benefit from a Weaker Dollar

If Trump’s policies lead to a weaker U.S. dollar, companies that generate significant international revenue could benefit. When the dollar declines, American goods and services become cheaper abroad, boosting sales and profits for U.S. multinational companies.

Key Stocks & Sectors to Watch:

• Technology: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA)
• Industrial & Machinery: Caterpillar (CAT), Boeing (BA), General Electric (GE)
• Consumer Goods: Procter & Gamble (PG), Coca-Cola (KO), McDonald’s (MCD)

(These companies do business globally, so a weaker dollar makes their products more affordable in foreign markets.)

Investment Strategy:

• Consider index funds or ETFs with heavy exposure to U.S. multinationals, such as SPY (S&P 500 ETF) or VXUS (International Stocks ETF), to capture global growth.
• Look at companies with pricing power, meaning they can pass higher costs to consumers if inflation rises.

2. Reshoring and Tariff-Protected Industries

Trump has repeatedly emphasized bringing manufacturing back to the U.S. and reducing reliance on foreign supply chains (especially in key industries like semiconductors, energy, and defense). If tariffs increase, U.S.-based manufacturers will have a competitive advantage over foreign suppliers.

Key Stocks & Sectors to Watch:

• Defense & Aerospace: Lockheed Martin (LMT), Raytheon Technologies (RTX), Northrop Grumman (NOC)
• Semiconductors & Chips: Intel (INTC), Texas Instruments (TXN), Micron (MU)
• Steel & Materials: Nucor (NUE), U.S. Steel (X), Freeport-McMoRan (FCX)
• Infrastructure & Construction: Caterpillar (CAT), Vulcan Materials (VMC), Martin Marietta (MLM)

(Government contracts and domestic infrastructure projects will likely support these industries.)

Investment Strategy:

• ETFs like ITA (Aerospace & Defense ETF) or SOXX (Semiconductor ETF) could provide broad exposure.
• Consider companies that benefit from Buy American policies or military spending increases.

3. Gold and Commodities as Inflation Hedges

If tariffs push import prices higher and government spending increases the deficit, inflation could pick up again. When inflation rises, hard assets like gold and commodities tend to outperform.

Key Investments to Watch:

• Gold Mining Stocks & ETFs: Barrick Gold (GOLD), Newmont Corporation (NEM), SPDR Gold Shares ETF (GLD)
• Oil & Gas Stocks: ExxonMobil (XOM), Chevron (CVX), Devon Energy (DVN)
• Agricultural Commodities: Archer Daniels Midland (ADM), Mosaic Co. (MOS), Bunge (BG)

(Gold serves as a store of value, while oil, gas, and agricultural commodities tend to rise when the dollar weakens.)

Investment Strategy:

• Holding physical gold or gold ETFs (GLD, IAU) could act as a hedge against inflation and a weaker dollar.
• Look at oil stocks if energy prices surge due to geopolitical tensions or supply chain disruptions.

4. Bonds & Fixed Income – A Safe Haven?

If Trump’s fiscal policies lead to higher deficits and more borrowing, interest rates may rise, making bonds more attractive relative to stocks.

Key Bonds & Fixed Income Opportunities:

• U.S. Treasury Bonds: Especially long-term Treasuries if rates stay high. ETFs like TLT (20+ Year Treasuries) could be an option.
• Inflation-Protected Bonds (TIPS): These adjust for inflation and could be valuable if prices rise.
• Corporate Bonds: High-quality companies issuing bonds could offer strong returns if rates stabilize.

(If inflation remains a concern, investors may shift money into bonds that offer stable yields and lower risk.)

Investment Strategy:

• Laddering bonds (investing in bonds of different maturities) could balance risk and reward.
• If rates rise too fast, longer-term bonds could lose value, so consider short-duration bond funds like SHY (1-3 Year Treasuries ETF).

5. Sectors to Watch for Risks

Not every sector will benefit from these policies. Some industries could face higher costs, supply chain disruptions, or increased volatility.

Sectors That Could Struggle:

• Retail: Walmart (WMT), Target (TGT), Home Depot (HD) – Higher import costs due to tariffs could hurt profit margins.
• Automakers: Ford (F), General Motors (GM), Tesla (TSLA) – If tariffs drive up the cost of foreign-made parts, production costs could rise.
• Tech with Heavy Overseas Manufacturing: Apple (AAPL), Dell (DELL), HP (HPQ) – If supply chains are disrupted or reshoring increases costs, margins may be squeezed.

(While companies like Apple and Tesla could benefit from a weaker dollar, they also rely heavily on overseas manufacturing, which may be at risk under Trump’s policies.)

Investment Strategy:

• Companies with strong pricing power will be better positioned to pass rising costs to consumers.
• Avoid stocks in industries that rely heavily on imports but don’t have domestic alternatives.

What it mean for Investors

Trump’s policies—whether on trade, tariffs, the dollar, or government spending—could lead to major shifts in the market. While some sectors will benefit from protectionist policies and a weaker dollar, others may struggle with higher costs and global uncertainty.

Key Themes to Focus On:

• Companies benefiting from a weaker dollar (tech, industrials, exporters)
• Stocks tied to domestic manufacturing and defense spending
• Gold, commodities, and inflation hedges
• Bonds as a defensive move if deficits rise

The market’s reaction will depend on how aggressively Trump implements these policies and how the Federal Reserve responds. Investors should remain flexible, well-diversified, and prepared for volatility.

This is not financial advice and you need to conduct your own research. Visit ForexLive.com for additional perspectives.

This article was written by Itai Levitan at www.forexlive.com.