Republican or Democrat presidents make the US dollar stronger?

There are a number of reasons. One is that the US dollar tends to perform poorly under Republican presidents, while Democrat presidents have more traditionally enjoyed currency strength.

If you go back over the past forty years or more, you will find that Republican presidents have left the US dollar in a worse place than where they found it, while Democrats left it in a better place judged by its performance against other developed currencies. But is there something inherent in what Democrat presidents do that makes the US dollar relatively strong, or is it all down to chance? There’s no doubt that Republican-led administrations have had their fair share of bad luck; the global financial crisis that started under George W Bush, and COVID that began when Trump was in office are two such examples. But is bad luck the whole story?

Steve Barrow, Head of Standard Bank G10 Strategy does not think so. Instead, it appears down to the fact that the Democrats have presided over better budget deficit management than the Republicans, even if we allow for the fact that big adverse shocks, like the global financial crisis and COVID, did balloon the deficit under the watch of the Republicans. This runs counter to what many might expect; the Republicans in Congress try to put themselves up as the champions of fiscal discipline, but the truth is exactly the opposite.

For instance, if we think of some of the big tax cuts that have taken place, Republican presidents Reagan, George W Bush and Trump have all introduced significant personal and/or corporate tax cuts while the Democrats in between, like Clinton, Obama and Biden have generally been much more cautious. And, if we assume that the currency market rewards those governments that show good budget discipline, then it seems logical that the US dollar should have risen under the Democrats and fallen under the Republicans.

However, Steve Barrow said this observation seems to run counter to the current sentiment in the market, which is that a second term for Trump will lead to a stronger US dollar, despite the fact that most agree that his policies would inflate debt far more than Harris. The Committee for a Responsible Federal Budget recently estimated that Trump would cause debt to rise by USD7.5tr over the coming decade, with Haris adding a more modest USD3.5tr to the USD35tr debt pile if she were to take office as president.

So why is there this difference between current market psyche that Trump is good for the US dollar and the history that shows deficit-loving Republican presidents tend to preside over US dollar weakness? Part of the explanation might just be about timing. For instance, those anticipating how the US dollar may trade in the days and weeks after a possible Trump win will be thinking about how Fed rate-cut expectations might be trimmed or how treasury yields could rise compared to other markets.

In short, all factors that could create short-term strength in the US dollar. Hence, it seems likely that these short-term traders and investors will have it right should Trump win, as the US dollar is likely to rise. But what about over the long haul?  Not the next few days and weeks, but the next few months, even years? Steve Barrow said: “the further out we go the less we can rely on our expectations about Fed policy to be a driving force for the dollar. Instead, an issue such as budget deficit control may come into its own as the key to the US dollar. For as we know debt is just a way of borrowing growth from the future, particularly if the debt reflects consumption and not investment”.

In other words, the US might be able to enjoy stronger growth now – and a stronger US dollar - but the cost will be weaker growth in the future, and that’s potentially damaging to the US dollar. It seems that longer-term investors in the market might appreciate this a bit more than short-term traders and, if this happens again should Trump be elected, it suggests that any short-term US dollar strength will soon give way to longer-term US dollar weakness.