As we have seen from the recent Brexit discussions, major events such as elections often create political and economic instability. This can cause a dip in investor confidence, putting downward pressure on currency. So when there is an upcoming US election, investors often become nervous about what could happen next, resulting in a weaker Dollar. But traditionally, once a new president is elected, stability returns and the Dollar tends to strengthen again.
This trend has been consistent for the first term of the last three US presidents – Republican George Bush and Democrats Bill Clinton and Barack Obama – suggesting it is nothing to do with the individuals themselves. In all three cases, we saw an initial dip followed by a recovery shortly after:
However, this is no ordinary election and it is unclear whether normal rules apply. The Dollar could be vulnerable to either the uncertain political actions of Donald Trump, or to ongoing frustrations for the established set of politics with Hillary Clinton. With this in mind, there is uncertainty around how the Dollar will perform following this election. We took a look at what a Clinton or a Trump presidency could mean for the Dollar.
Clinton means consistency
While nothing is certain, the polls are currently favouring Clinton after the heated televised debates. A Clinton victory is likely to result in the normal trend of a stronger Dollar, as this result would be perceived as less of a shock to the political system. A continuation of a Democratic presidency should result in a smooth transition period and would suggest that there are no significant policy changes coming in the short term.
Furthermore, Clinton has extensive experience as a senator and as Secretary of State, so markets know where they stand with her. It is also felt that she would continue to support Yellen as chair as the Federal Reserve, which means it would be likely that we would see consistency in monetary policy as well.
However, a Clinton presidency could also mean more of the same frustrations. While the US economy has recovered from the 2008 recession during Obama’s presidency, it has not recovered as much as some feel it should have done. For Americans who are worried about government debt or low average wages, consistency could potentially be a concerning message.
Some of Clinton’s policies are also unappealing to markets. For example, she plans to implement some more complicated tax laws, which would result in increased taxes on the wealthy. This is an approach that the Democratic party has previously been cautious about for fear of weakening the economy, but both Obama and Clinton are in favour of.
Overall, it seems likely that the appeal of consistency will win out over these concerns, resulting in a stronger Dollar following a Clinton election – but we would expect these gains to be fairly modest.
Trump means transformation
US politics has never seen a presidential candidate quite like Trump – even his candidacy was a surprise and his radical approach has continued to make the headlines throughout his campaign. As a greater unknown, it is likely that a Trump victory would break the normal trend and result in longer term downward pressure on the Dollar, while markets assess what this means for them.
A major concern for markets is that Trump seems to favour isolationist policies, which could damage relationships with major trading partnerships such as Mexico and China. He claims that his approach of implementing higher tariffs on imported goods would benefits US manufacturers and therefore create more US jobs. There is however a concern that trading partners would retaliate, potentially triggering a global trade war and risking a recession.
It is also unclear what Trump’s policy of dramatic tax cuts would mean for the US economy. His campaign argues that these would provide a boost to the economy by encouraging Americans to work, save and invest. But there is uncertainty about whether it is sustainable in the long term without significant cuts to government spending. So it is likely that markets would want to wait for a while to see what impact this has on the economy before they were willing to re-invest in the Dollar.
Finally, there have been suggestions that Trump might fire Yellen as Chair of the Federal Reserve, or that she might choose to resign if he were elected, due to his strong criticism of her and suggestions that she has kept interest rates artificially low for political reasons. While some in Wall Street may agree with the sentiment, it is very unusual for a US politician to openly criticise the Fed and this itself could be a cause for concern. It is also unclear who he would replace her with and this further uncertainty could further increase investor anxiety.
There are a number of perceived risks associated with a Trump victory, and so it is likely that this would result in a greater weakening for the Dollar over a longer period of time than a Clinton victory would.
What does this mean for your money?
From a market perspective, neither candidate is particularly strong. However, Clinton is generally the preferred option, and the Dollar has been remaining fairly calm while she leads the polls. But as the recent Brexit surprise in the UK has shown, polls don’t always get it right so there could still be some nervousness among investors. As a result, it is likely that there will be some weakening of the Dollar over the next few weeks, but it is too soon to tell how much of an impact this could have, or for how long.
So whether you need to buy or sell US dollars, it is worth bearing in mind that there might be be a rise in volatility, especially if Trump were to surprise the markets by winning the election. Just like the risks of Brexit, we encourage you to think about how you can hedge your risk.
Whatever you feel is the best approach for you, HiFX is here to help. If you’d like to discuss your situation in more detail, please contact us. Or you can find some details on managing your money in a volatile market here.
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