Presidential impact on the US dollar

President Biden has tried to portray these mid-term elections as a fight between democracy and chaos, not Democrats and Republicans.

>> Presidential cycle and impact on the U.S dollar

Quite clearly, there are lots of ‘ifs’ to such an outcome. The first is if Trump announces that he will be a candidate for the Republican nomination when he makes his “big announcement” on November 15^th. The second ‘if’ concerns the possibility that he might not win the Republican nomination. And the third is clearly that he might not win the presidency in 2024 even if he gains the Republican nomination.

Given such uncertainties, the FX market would seem perfectly justified in ignoring all the brouhaha surrounding the possibility of a second term for Trump until it has actually happened, if indeed it happens at all. But just given the volume that Trump generates with his campaigning, and particularly the controversy that seems to go with it, the FX market may find it hard to drown out the noise.

It is noted that Republican presidents have tended to leave office with the dollar lower than when they started. That might lead some to think that the possibility of a Trump comeback should weigh on the U.S dollar. But Trump was different in the sense that the dollar basically flatlined through his presidency compared to prior Republican incumbents such as Bush Jnr and Snr and Ronald Reagan. And don’t forget that this was despite Trump’s comments on a number of occasions that the dollar was too high.

Today it is much higher still and we can only assume that if Trump were to win and inherit a dollar at these levels, or higher, his complaints about excessive strength would grow louder. His complaints about China would likely grow louder too given that the country failed miserably to meet the import targets that Trump had agreed with his Chinese counterparts in early 2020.

This being said, Mr. Steve Barrow, Head of Standard Bank G10 Strategy, argued along with many others at the time, that the Biden administration would not suddenly ease up on China and that’s been the case even though maintaining tariffs on Chinese imports has cost the US in terms of higher inflation. The trade war with China initiated by the Trump administration did not seem to have any material impact on the FX market even if many suggest it helped sow the seeds for many of today’s supply chain tensions that were fully unleashed during the pandemic.

>> Some signs of a turn for the US dollar

Another factor that did not seem to have a material impact on the dollar, or at least not a negative one, was the manner in which Trump handed over power, particularly the Capitol Hill riots of January 6^th 2021. Lots has been spoken and written about the challenge to democracy that this presented.

Indeed, President Biden has tried to portray these mid-term elections as a fight between democracy and chaos, not Democrats and Republicans. He has done so presumably because he can see Trump coming over the hill again.

In another part of Washington, the Federal Reserve might be warily looking out for a Trump return as well. Trump criticised the Fed for having rates too high when they peaked at 2.5% in 2019. Next year, the fed funds rate could be double this level and there might not be too much in the way of cuts before the 2024 election either.

Could this too be a reason for dollar bears to fear a Trump return? Possibly, but it was never clear that these complaints really hurt the dollar back then. In fact, when all said and done, the dollar was remarkably stable during Trump’s first term despite the fact that he was seen as such a controversial president. Perhaps this means that we put too much focus on politics? Perhaps, with so much else going on, not least the pandemic, the politics got lost last time.

Whatever it was, Mr. Steve Barrow is not so sure that a Trump return would be so quiescent for the dollar. As for direction, he suspects that the prospect of a return for Trump is more likely to work in favour of a stronger dollar. The problem is that the economic fundamentals will be working against the greenback as the next election nears and, in the end, these will win out over politics.