Biden vs. Trump: Why investors should get ready for a weaker dollar either way

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It isn’t just stock-market investors who are bracing for volatility around and beyond Election Day next month.

The potential for an unclear result on election night and even a contested outcome is also putting currency analysts on edge, though the ultimate direction for the U.S. dollar following a victory by either Democratic challenger Joe Biden or President Donald Trump is likely to be lower, according to one currency watcher.

“ In our view, Biden is likely to win and investors should position for a weaker dollar, both in the immediate aftermath of the results and for the long haul,” wrote Steve Barrow, head of G-10 strategy at Standard Bank, in a note.

A surprise win by Trump, however, would likely see an initial rise by the currency — partly due to his tax-cutting agenda and partly due to safe-haven demand because investors would fear more of the “combative international politics” that characterized his first term, Barrow said.

But even in that scenario, dollar strength would be unlikely to last, he said, and the currency would likely be much weaker under a Trump presidency, The important takeaway, however, is that the dollar is likely to fall either way.

Why is that? Barrow argued that the COVID-19 pandemic has created a national and global emergency “that far transcends the importance of who holds the keys to the White House.”

The legacy of the crisis will be a huge U.S. budget deficit that won’t be financed internally and will therefore require large capital inflows at a time when U.S. yields have lost much of their advantage over other developed countries, while equities still stand at levels that look inflated compared with stock markets in other countries, he said.

The dollar was higher on Thursday, finding support on haven-related buying as an acceleration in COVID-19 cases prompted renewed restrictions on movement in several European countries. The ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, was up 0.4%.

The dollar has been under pressure for much of this year, with the DXY down 2.7% year to date. Thursday’s strength in the dollar came as global equities sold off. The Dow Jones Industrial Average

was down around 220 points, or 0.7%, in recent trade, while the S&P 500

was down 0.8%.

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