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Goldman Sachs Says a Divided U.S. Government Could Boost Asian Currencies

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  • A divided U.S. government means any further fiscal stimulus "probably won't be as big," said Andrew Tilton, chief Asia Pacific economist at Goldman Sachs.
  • That would leave interest rates in Asia, particularly in China and India, "notably higher than in the U.S.," he added.
  • Therefore, bond markets in Asia will continue to look attractive to investors and further capital flows into the region would lift Asian currencies, he said.

SINGAPORE — The U.S. elections will likely result in a divided government — and that could lead Asian currencies to appreciate against the greenback, a Goldman Sachs economist said on Thursday.

The election results are still being finalized, but NBC News has projected a victory for Democratic candidate Joe Biden in the presidential contest. Democrats will also keep their House majority, NBC projected. But Republicans are favored to retain control over the Senate, as Democrats would have to win both undecided races to make Vice President-elect Kamala Harris the tie-breaking vote in the chamber.

Such division in Washington means any further fiscal stimulus in the world's largest economy "probably won't be as big," said Andrew Tilton, Goldman's chief Asia-Pacific economist.

"Other things equal, that will mean growth won't be quite as high, interest rates in the U.S. won't be pushed up quite as much," he told CNBC's "Street Signs Asia."

U.S. growth and interest rates could still get a lift next year from Covid-19 vaccine developments, said Tilton. "But I think that will still leave Asian interest rates, particularly in places like China and India, notably higher than in the U.S.," he added.

Therefore, bond markets in Asia will continue to look attractive to investors, explained Tilton. He pointed out that investors have been pouring money into China's bond market, with big inflows reaching as much as $20 billion a month.  

"We'll see those capital inflows and that will support currency appreciation in the region relative to the dollar. So we're pretty optimistic about Asian currencies appreciating next year, likely led by the renminbi," he said.

Less risk of higher tariffs

Asian economies could also benefit from Biden's foreign and trade policies, said Tilton.

Many economies in Asia are dependent on exports, which came under pressure from President Donald Trump's trade war with China. The trade fight saw the U.S. and China — the world's top two economies — slapping elevated tariffs on each other's products. Those retaliatory moves came to a pause when both countries signed the so-called phase one trade deal in January this year.

A Biden administration would mean less uncertainty and fewer surprises for Asia, which is helpful for regional exports and currencies, he predicted. Further escalation in trade tariffs is also likely to end, added Tilton.

"Clearly we've ... in the last few years seen an escalation in tariffs. And that's likely to end, not necessarily a big reduction but probably less risk of tariffs going higher," he said.

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