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How Will The Upcoming November 2020 Presidential Elections Affect The US Dollar

Sep. 22, 2020 10:47 AM ET
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While the US dollar is undergoing the longest period of decline since 2010, a hopeful few are waiting for the 3rd of November, anticipating that Election Day will put an end to the political turmoil that negatively affects the USD. The following article will explore how the US Election cycle affects the USD exchange rate, the possible outcome of the elections, and how each scenario will influence the US dollar.

How Does The Election Cycle Influence The US Dollar Exchange Rate?

In discussing the factors that affect the US dollar exchange rate amidst the Presidential Elections, it is impossible to overlook the importance of the anticipation of the monetary policy, which, in turn, is determined by which of America’s two main parties wins the elections. Although both the Republican and the Democratic candidates are usually promising economic growth, reduced unemployment, and, by definition, a stronger US dollar, the way they approach the task is usually drastically different.

The Republican party is usually perceived as more business-friendly, and their monetary policy is often based on lower taxation, reduced government spending, while being aimed at creating job opportunities and decreasing national debt. A good example of what effect the anticipation of the Republican party taking reigns has on the USD exchange rate is the 2014 midterm elections. As the investors predicted that the Republican party will rise to power, the global market saw the US dollar trading at all-time highest against the Swiss franc, Japanese yen, and euro.

On the other hand, the monetary policy of the Democratic party is centered around the increased government spending, higher taxation, a variety of social benefits and new projects to be introduced, and, creation of the job opportunities in the government, which, consequently leads to the government expansion. The effect of the expectation of the Democratic party’s victory is best illustrated by the US Presidential Elections of 2012. The lack of certainty and a certain level of anxiety has led investors to maintain relatively small exchange rate variations, all while the individual trades involving the USD being largely chaotic and volatile.

That being said, the question is what should one do if the outcomes of the upcoming elections are unclear? The answer is the Presidential Election Cycle Theory, introduced by Yale Hirsch in 2004. According to this theory, the state of the stock market, as well as the dollar exchange rate, can be predicted by the four-year term of the presidency. During the first year, the dollar is at its weakest and the new President and their government are still adjusting to the new position and working out an effective policy strategy. Year two sees the gradual increase of the USD, as the policies implemented are beginning to show some results. Finally, the US dollar is at its highest during years three and four, as the uncertainty about the market shrinks, and the monetary policies are strong and efficient. While the theory sounds nice and logical, it is often criticized for oversimplifying the processes associated with the presidential election cycle. Based on key points shown in market analysis the theory ignores a variety of factors that are not directly controlled by the government but have a significant impact on the strength of the US dollar. The Presidential Election Cycle Theory fails to account for the final years of the two-term president, and, on top of that, is pretty useless in predicting the state of the US dollar following the upcoming November Elections, as there is no room for major factors such as the outbreak of global pandemic in it. Like many theories, the one discussed above has its own followers and critics, however, we are yet to see how useful it is in providing somewhat accurate predictions about the USD amidst the political turmoil and the healthcare crisis that America is currently faced with.

For people directly involved with day-to-day trading of the USD, uncertainty is the best gift they could ask for. In moments like these, at least based on the reviews of trustworthy FX brokers listed by BrokersOnline, companies start to somehow encourage traders to jump into the mix with various enticing offers. This could be a promise of doubling profits or anything that could look like an advantage. In this moment of political “level” so to say the FX market flourishes more than anything and is sometimes quite predictable as well.

November 2020: What To Expect From The Elections And The US Dollar

As trying to predict the outcome of the US Presidential election is similar to trying to see the future in a foggy crystal ball, it is no surprise that experts fail to agree on a single most plausible outcome. Here, we have gathered four main possible scenarios, and will not proceed to discuss the impact they might have on the exchange rate of the US dollar.

If Biden wins in the upcoming elections, he might be faced with three possible turns of events. He will either begin his presidency with the Republican-dominated Senate and, in this case, the US capitalism will remain unhinged with more trading ties to be formed around the world, and, by definition, more fiscal support that will put an end to the long decline of the USD. The second scenario would have Democrats enjoying a clean victory, in which case the dollar will be weakened by Sanders and Alexandra Ocasio- Cortez guiding the implementation of social benefits’ projects at the expense of banks and pharma. The third case scenario is the most dramatic of all, but not entirely impossible. If the Democrats win the November 2020 Elections, President Trump can refuse to accept the victory and call for an investigation of possible fraud. In that case, the ongoing decline of the USD will be exacerbated even further, and the entire state of US economic recovery will be jeopardized.

Should the Republicans win the elections, two further developments can be expected, Trump can be stuck with the Democrats-dominated Senate, which, although unable to control his tendencies to impede international relations, will be able to stop his business-favoring legislation. On the other hand, should the Republicans enjoy both the control over the Senate and Trump being re-elected, the dollar will be influenced by the further damages of the US trade ties and the Republicans being able to pass their legislations freely and strengthen the US dollar.

We are yet to see what change the US Elections will bring about, and what the state of the US dollar will be after the 3rd of November. However, it is already clear that coupled with the outbreak of the global pandemic, the US economy is undergoing a shock that has not been witnessed before.

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