Looking past the ongoing worldwide impact of coronavirus, the news item set to dominate the agenda in late 2020 is the US presidential election. It’s an event that doesn’t only carry major political weight in the US and overseas. The impact it will have on markets and economies far beyond the USA can’t be overlooked – not least in terms of the value of the US Dollar (USD).
President Trump, the incumbent Republican candidate, is looking to return to the White House for a second term. But he faces stiff opposition from Democrat candidate Joe Biden after what has been (at times) a controversial presidency. And, in the context of coronavirus, it’s thought that postal voting will significantly increase – putting back the result at least a couple of weeks.
For those watching and waiting on the eventual outcome, it’ll be an uncertain period of time – not least for traders and investors looking to plot where USD moves next in response.
The US Dollar after previous elections
One thing that all investors will agree with is that markets don’t react well to uncertainty. This can be seen in the performance of the British Pound (GBP) after the UK’s decision to leave the European Union, for example. On a national level, elections bring uncertainty – unless you can be sure of the result. This certainly isn’t the case as far as the US election is concerned.
Traders may be wondering if their next move is to stick or twist on their position until we know whether it’ll be President Trump or President Biden. But we can see how the US election affects currency markets from past examples. And one thing that traders can certainly learn is that the greenback will increase its value right after the result is declared – no matter who wins.
A big reason is that a result ends the lingering uncertainty. But it’s also possible to see that, in nine out of the 10 elections since 1980, USD has strengthened in the first 100 days of a brand-new administration. The knock-on effect is felt around the world, with a strong USD leading to a drop in US exports – but making it cheaper for the US to import goods from elsewhere.
What could a Biden election victory mean?
It’s also interesting how a Democrat or Republican win can affect USD. If Biden is elected to be the 46th President, market traders and analysts can look at historic data that shows the Dollar’s value increases by an average of 4% after a Democrat win. US economic performance tends to be stronger under a Democrat administration too.
But a Biden presidency – and Democratic congress – isn’t necessarily seen in a positive light by investors. A Goldman Sachs report says: “Biden’s proposals to raise corporate taxes and enact regulatory changes could make US equities less attractive than international assets. Combined with large fiscal stimulus, these would likely accelerate the trend of US Dollar weakness.”
In addition, a Biden presidency would result in a large fiscal stimulus for the US economy. This would benefit recovery at home – but leaves USD at risk of being weakened globally.
What could a Trump election victory mean?
If President Trump can defy the opinion polls and return to the White House, the policies that he’s expected to pursue will follow on from his first term. Much of Trump’s focus is built upon the ‘America First’ mantra – increasing America’s global isolation on matters such as military intervention, environmental accords and even defence alliances with European partners.
But the greenback has enjoyed enduring strength during Trump’s administration – even if it’s not always to the delight of the President himself. A ‘protectionist’ approach to trade has also put the US at loggerheads with China, Canada, India, Mexico and the EU. Yet, this does mean that investors can expect little deviation in the event of a Trump victory.
Based on the strength of the Dollar over the past four years, that eventuality could offer more assurance to investors who traditionally back the resilience of USD. And should the trade ‘war’ continue with various global partners, currencies such as the Chinese Yuan and the Euro stand to lose most up against the growing dominance of the Dollar on the forex market.
For all the forecasts and expectations, however, the reality of the US election’s impact on USD will soon become known. The lingering threat of coronavirus is another factor that needs to be weighed up. With the US struggling to contain its spread, perhaps the historic markers of how the greenback performs after a presidential election can’t be fully relied on this time around?
Then again, it’s something that investors have been contending with for most of 2020. As such, it does indeed leave us with the election as – for the time being – an uncomfortable unknown.
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