Trump's immigration policy – relevant for USD exchange rates? – Commerzbank

Why are the inflationary effects of possible or announced US import tariffs widely discussed, while the corresponding effects of deportations are not? The Peterson Institute estimates that in the extreme case, more than 8 million workers could be withdrawn from the US labor market. Such a number should be economically relevant to the markets. Currently, there are around 7½ million unfilled vacancies in the US labor market. When the number reached 12 million in 2022, it resulted in wage inflation of around 6% (year-on-year), Commerzbank’s FX Head of FX and Commodity Research Ulrich Leuchtmann notes.

Mass deportations may weigh on the USD

“Many people do not expect deportations to be as extreme as this and assume they will be limited to a few symbolic cases. The announcement that Stephen Miller will become Deputy Chief of Staff in the White House, but above all that Tom Homan will become ‘border czar’, suggests that one should not completely lose sight of the fact that things could turn out differently. As a reminder, Homan is considered the father of the strategy of separating children from their parents at the border to deter immigrants.”

“If — in a risk scenario — deportations were to take on proportions that would fuel wage inflation (at least in some sectors), that inflation would hardly be USD positive, unlike the one triggered by import tariffs. It would be the consequence of a negative supply shock, i.e. a reduction in the productive capacity of the US economy.”

“It would make capital invested in the US less profitable: the greater the labor shortage, the larger portion of the cake goes to the labor factor and the less remains for the remuneration of capital. The attractiveness of the dollar as a ticket to invest in the US would be reduced. While this is not the most likely scenario, it is another argument in favor of my view that bets on sustainable USD strength are incredibly risky. The more such arguments emerge, the more I feel comfortable warning against betting on sustained USD strength.”