As the US election on November 5 draws near, its potential to significantly impact the Forex markets and the value of the US dollar becomes ever more apparent. Alpari, a prominent broker in the Forex market, has compiled a comprehensive guide detailing how past elections have influenced the dollar and predicting the effects a win by either Harris or Trump could have on the market. The results of the election could lead to varying exchange rates between the US dollar and other major currencies, shaped by the candidates’ policies and leadership style.
Political Shifts and Market Reactions
Alexey Efimov, a Market Analyst at Alpari, notes: “The US election and the arrival of a new President mark pivotal moments for the US economy, which directly influences the strength of the US dollar. While predicting the outcome remains difficult, the election results could have broad-reaching effects, not only on the dollar but also on other sectors, from commodities to cryptocurrency.”
The US Dollar under Biden’s Presidency
Historical research suggests that the US dollar tends to appreciate under Democratic presidents. Under President Joe Biden’s leadership, the US dollar saw significant strength due to fiscal stimulus packages like the American Rescue Plan Act of 2021. This fiscal intervention sparked a rise in inflation, prompting the Federal Reserve to increase interest rates to a 23-year high, thereby boosting the demand for the US dollar. In fact, the US dollar experienced its largest annual gains in recent years, increasing by 8.2% in 2022 and 6.4% in 2021.
The US Dollar under Trump’s Influence
Former President Donald Trump, however, has historically shown preference for a weaker dollar. Trump believes that a strong dollar burdens US companies by making exports more expensive. During his presidency, Trump frequently criticized China for alleged currency manipulation and imposed tariffs, leading to trade wars that weakened the Euro against the dollar. Trump’s aggressive trade policies, such as his 10% blanket tariff on European goods, may influence currency markets further if he is elected again. Between 2018 and 2020, the US dollar rose 15.3% against the Euro due to Trump’s tariffs.
Post-Election Market Volatility
In the aftermath of the attempted assassination of Trump in July, the US dollar initially strengthened as investors flocked to it as a ‘safe haven.’ However, this temporary spike in value has since receded, and polls have tightened following Kamala Harris’s emergence as a key Democratic contender. Harris is expected to mirror Biden’s policy approach, focusing on infrastructure and social welfare investments.
As of the third quarter of 2024, the US dollar had lost all its year-to-date gains, partly due to market expectations that the Federal Reserve would soon cut interest rates. In fact, the Fed lowered its benchmark interest rate by 50 basis points on September 18, 2024 — its first rate cut in four years.
Despite this, Alpari suggests that the election could still lead to a stronger US dollar as investors turn to it in times of uncertainty. Additionally, market volatility may increase, which could create further opportunities and risks in the Forex markets. Alpari advises traders to diversify their currency portfolios to help mitigate potential risks and maximise opportunities during this volatile period.
Navigating Forex Market Uncertainty
With the US election looming, it’s clear that the outcome will have a considerable impact on global currency markets. Whether Harris or Trump emerges victorious, both candidates are expected to introduce policies that could either bolster or weaken the US dollar. Investors and traders are advised to stay informed and consider hedging their positions to navigate the potential volatility in the Forex market.