US Election Update: What’s next for the US Dollar?
Posted by David Moore on October 30th, 2020.
US President Donald Trump recently bemoaned just how much the coronavirus has eclipsed the 2020 elections as much of the build-up took a backseat to the global pandemic.
However, this week will see finally the culmination of all the Democrat’s and Republican’s campaigning as the US election becomes a greater focus for currency markets.
US political uncertainty has increasingly driven movement in currency markets in recent weeks, so what could follow for the US Dollar in the wake of the election and beyond?
US Stimulus Package Uncertainty
One of the major movers of the US Dollar in recent weeks has been speculation over a US stimulus package.
Many were hoping for it to manifest before the US elections, but this has failed to materialise, souring market sentiment, which in turn boosted US Dollar exchange rates.
The ‘Greenback’ has fluctuated as talks between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have remained in deadlock, with Trump swaying, and then finally saying they’d come after the election.
Trump has promised a massive stimulus deal after the election – or, in his own words, “the best stimulus package you’ve ever seen”, while blaming Pelosi for the delay.
If a Covid-19 stimulus package does appear after the election, whether on the Democrat’s terms or the Republican’s, then we could see safe-haven demand for the US Dollar slide as the world’s largest economy begins to recover.
Previously, Trump’s administration had offered a $1.8 trillion stimulus offer, which was later rejected as it fell short of the Democrat’s $2.2 trillion target.
But could a larger stimulus package be agreed at the beginning of the new Presidency? If so, this could boost market demand for riskier assets, limiting demand for the safe-haven ‘Greenback’.
Biden Leads in the Polls
With days to go until the election, Biden appears to be continuing to lead, as the polls have suggested during most of campaigning.
Biden has an eight-point lead in recent polls, while some expect a landslide win for the Democrats and a ‘blue wave’ that would see them sweep the Senate and win the presidency.
This result could undermine the US Dollar due to a market aversion for changes to the status quo, and the likelihood of a Democrat government increasing corporate taxes to fund spending initiatives.
How Will Covid-19 Affect the President and USD after the Election?
The coronavirus will continue to drive movement in the ‘Greenback’ after the election, no matter who wins.
However, Biden and Trump will undoubtedly have significantly different approaches, and USD investors will be taking careful note of this.
Vivek Murthy, a key adviser to the Biden campaign, said “You would see an approach that’s driven by science and by scientists”, while the Biden campaign has also claimed that it will intensify wide-spread testing, including home and instant tests.
Investors will, however, be keeping a close eye on how the newly elected president performs in the early weeks following the election.
Meanwhile, we could see the US Dollar benefit from its negative correlation with the Euro as Europe’s Covid-19 infection rates climb, pushing large economies like France and Germany to reinstate nationwide lockdowns ahead of the Christmas season.
This second wave of coronavirus may underpin the US Dollar going into winter, and limit downside potential following the election as investors seek safe-havens while the global economic recovery comes under threat.
Continued Political Uncertainty Would Boost the Safe-Haven ‘Greenback’
The US Dollar would usually strengthen following the US presidential elections as a certain degree of calm returns to domestic politics.
Under normal circumstances, the US economic and political outlook would stabilise and the US Dollar would gradually strengthen over the months after an election.
However, the current situation is far from normal and the US Dollar could continue experiencing heightened volatility.
The election result could be delayed for some time as coronavirus, the significant rise in postal votes, and some swing states likely to be extremely close taking longer to count votes.
On top of this, Trump has constantly repeated claims of voter fraud, so any potential drawn out political complications would add further volatility to US Dollar exchange rates.
Overall, the US elections have potential to continue driving significant volatility in USD exchange rates.
With its safe-haven appeal amid the global pandemic, the US Dollar could strengthen.
In contrast, some analysts believe a ‘blue wave’ and an agreement on US fiscal stimulus could weigh on US Dollar exchange rates. Either way, currency markets could be set to fluctuate.
Investors will also continue to monitor the Covid-19 situation in Europe and beyond. As a result, the US Dollar would be well positioned to gain as traders flock to the safe-haven USD while the global economy falters from the second-wave of the coronavirus pandemic.
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