Presidential cycle and impact on the U.S dollar

In the U.S midterm elections 2022, US Presiden Biden has faced many challenges.

>> Some signs of a turn for the US dollar

This refers to the observation that the U.S dollar has a tendency to rise under Democratic presidents and fall when Republicans are in charge. It has happened again with Biden at the helm, but will that change if Congress is taken over by the Republicans?

The observation that the US dollar seems to perform better under Democrat Presidents than Republicans seems to stand the test of time. Ronald Reagan did see the dollar initially rise, but it was still much lower than the starting point after Bush Snr ended the Republican dominance with his defeat to Clinton in 1992. Clinton presided over a rising dollar as did fellow Democrat Obama. Sandwiched in between the two was Bush Jnr who saw the dollar fall while the next Republican president Trump also saw the dollar fall, although it was modest by previous Republican standards.

What about Biden? Here we’ve actually seen the strongest dollar rally of all in the first two years of his presidency. The first question is “why”, and the second is whether losing control of Congress could end the rally?

Of course, it might just be coincidence that Democrat presidents have seen the dollar rise while Republicans have presided over weakness. Or it might be bad luck given that recessions and negative shocks have more often occurred when Republicans have held the keys to the White House.

Democrats would probably argue that their management of the economy has been better and that’s why the dollar has been strong. Another issue relates to the performance of equities, for it is often perceived that these may perform better under Republican presidencies given the greater incidence of things like corporate tax cuts (although the evidence actually supports the opposite).

Why might this mean a weaker dollar and not a stronger dollar? Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said the answer could lie in some of the arguments we have been making recently about how the US dollar may move inversely to asset prices because asset price performance dictates whether investors who choose to finance activity through the FX swap market become too short of dollars when asset prices fall and too long when they rally.

>> Strong US dollar affecting global currencies

Yet another argument is that Republicans are more likely to generate trade policy uncertainty which weighs on the U.S dollar. At the end of the day, it is difficult to ascribe the reason for the U.S dollar’s climb when the Democrats are in control, or the slide when a Republican president gets behind the wheel.

“We rather suspect that it is not due to any one factor, or a group of factors, but more a function of the economic and political situation at the time. In Biden’s case, it is difficult to argue that the Democrat presidency and Democrat control of Congress has combined to produce a strong economic backdrop. Instead, it seems that policy mistakes have been made that have left the economy too close to full capacity when the inflation shock of surging energy prices hit. Some might blame Biden for those mistakes; more would blame the very generous levels of Covid support under the Trump administration”, said Mr. Steve Barrow.

Whatever it is, we do not seem to be in a purple patch for the economy or policymaking and that’s told in the poor performance of bonds and stocks, which has likely lifted the dollar via higher risk aversion, safe-asset demand and this overhedging issue we mentioned earlier.

Will a Republican-controlled Congress change this equation and so push the dollar back down? Mr. Steve Barrow’s view is that presidential politics is more likely to be a factor when it is powerful, meaning that the President controls both chambers. That’s unlikely to be the case for the next two years and it could mean that, if political factors have had any role to play in lifting the dollar in the first two years of Biden’s term, they won’t be supportive in the remaining two years.