Stock markets are recovering today as polls open in the US and Americans are set to cast their vote for the next US president.
Apart from the devastation caused by the coronavirus pandemic, the U.S. election is the second largest source of uncertainty for global currency markets as the prospects of a drastic policy change weigh on the dollar.
The dollar strengthened last week, although it was bearish today and reached a monthly high on Monday. Nevertheless, it is still about 10 percent below its March highs.
Democratic challenger Joe Biden is ahead of President Donald Trump in the polls, with an 8.6 percent lead according to FiveThirtyEight.
But the election outcome could be tighter, with tighter races in several contested states, where the outcome will ultimately be determined by the collegiate electoral system.
Four years ago, then Democratic candidate Hillary Clinton was ahead of the president in the polls, but still lost the election.
“Volatility is increasing because there is very little liquidity for hedging around the election. Everybody feels the same, nobody sells this stuff and thinks everything is great,” said Jordan Rochester, currency analyst at the Nomura currency platform, in a note.
As the results came closer, Monex Europe, a leading commercial forex specialist, published an analysis of how the election day results could affect the dollar.
Final forecasts for Election Day and votes on who is likely to win
During the course of this year, the dollar weakened due to a deaf policy of turning away from the Federal Reserve and mismanagement in dealing with the pandemic.
Ranko Berick, head of market analysis at Monex, said it is possible that the dollar “is now trading at a ‘trump risk premium’.
“A Biden victory could improve the outlook for macro growth in the US due to better pandemic management,” he said. “In my opinion, this would be slightly positive for the dollar against the G10 currencies.
However, other analysts have argued that a Biden victory could weaken the dollar due to its large stimulus proposals.
Monex’s analysis calls a trump card win a “status quo result”, which means that the current dollar weakness would likely continue.
“However, uncertainty about trade policy would persist, which could hinder a likely recovery in risk appetite in 2021,” Berick said. “In the event of a Republican wave, new and uncertain risks would be introduced into the markets”.
Apart from that, Trump fought a strong dollar for most of his term as president in a world on the brink of a pandemic. He often explained that a strong dollar gives other countries a competitive advantage and makes things difficult for U.S. manufacturers.
Last year he tweeted that he was not happy with a strong dollar.
Markets hate uncertainty, so the threat of a serious constitutional crisis “is likely to hit the dollar,” says Berich.
He added: “By way of comparison, during the US civil war, the exchange rate of the pound to the dollar was approaching 10. The effects are likely to worsen as the crisis drags on”.
Regardless of the outcome of the election, the US dollar will continue to be affected by the continued spread and/or containment of the pandemic and the development of a vaccine.