Insight

The U.S. Presidential Election and the U.S. Dollar: 3 Scenarios

There is no 'drop' more important than the one in the ballot box this Election Day. To help your business navigate post-election swings, our team of FX experts will be standing by during extended hours on Tuesday and Wednesday.

How will the outcome affect the value of the U.S. dollar? Given dramatic differences between the Trump administration and a potential Biden administration, everyone is watching the polls and election dynamics closely.

It is important to note that historically, the dollar’s value doesn’t track presidents in a partisan way. More on that in this earlier Insight post. But regardless of the election outcome, expect plenty of movement in the coming days. 

“I expect volatility across asset classes to spike over the next 48-72 hours,” says John Doyle, VP of Trading & Dealing at Tempus.

Let’s look at three election scenarios, and how the dollar’s value might be impacted by each in the short-term.

Biden Wins Decisively

If Democrat Joe Biden wins decisively—meaning his victory is clear by the end of tonight or early Wednesday—expect the dollar’s value to fall. For weeks, markets have been pricing in the likelihood that Biden would win the White House and Democrats would flip the Senate blue while holding the House. 

Such a “blue wave” would pave the way for a major COVID-19-related stimulus package and a potential infrastructure spending bill—both of which would likely negatively impact the U.S. dollar’s outlook. 

But others believe the dollar’s value has already bottomed out in 2020. The U.S. dollar index has fallen more than 7% since Trump’s inauguration and is 3% down just this year. A Biden administration could restore more normal trade relations with much of the world, delivering what some have called a “sanity premium” to the buck.

Trump Wins Decisively

If President Donald Trump is re-elected decisively, current dollar market dynamics should hold, perhaps after initial fluctuation given current general market anticipation of a Biden victory. 

The dollar’s relative low value will persist. It could even worsen, in fact, as uncertainty around the pandemic (and thus the U.S. economy) continues.

Uncertainty Reigns

It is quite possible the winner won’t be apparent for days or even weeks, however. A huge boost in mail-in voting due to the pandemic increases uncertainty around the timing of each state’s results.

“Due to the differing state-by-state rules, we are likely to see a delay in the results of mail-in voting,” John Doyle says. “There is also a strong possibility of a “mirage” in which one candidate looks to be trailing, only to recoup those losses once all mail-in votes are counted. This is a unique development due to the pandemic, and it pushes up volatility.”

If results are close in certain states, as in 2016 and Florida in 2000, potential litigation could drag the process out. Amidst contested results and other developments on the ground in battleground states, the dollar’s value could be all over the place. Should a contested election drag on, the Euro, an alternative reserve currency, could stand to benefit. 

Tempus is here to help regardless of the election scenario that soon unfolds. To ensure that everyone we work with gets the best advice at the right time, we are extending our trading hours of service to you on Election Day and Wednesday. As always, Tempus Online is available 24/7.

 

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Juan Perez Senior FX Trader and Strategist Tempus

The U.S. Presidential Election and the U.S. Dollar: 3 Scenarios

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