2020 US presidential election heats up, whats in store for the US dollar?
Currencies Direct October 23rd 2020 - 3 minute read
In any other year a presidential race between Donald Trump and Joe Biden would have been dominating headlines and influencing the US dollar for months in the run up to November’s election.
However in 2020, the US election has taken a bit of a back seat to the global pandemic.
But now with less than two-weeks to go, the election looks to be commanding more attention as the US braces for what is set to be the most contentious election in living memory.
Trump’s coronavirus diagnosis throws election race into chaos
October has seen the US presidential election thrust back into the spotlight, largely in response to Trump’s positive coronavirus test, which threw his election campaign into chaos.
News that Trump had been airlifted to hospital ‘out of an abundance of caution’ fuelled speculation over the President’s health, which spooked markets at the start of the month.
While market sentiment quickly improved again after Trump was discharged from hospital, the President’s subsequent suggestions that the public should ‘not be afraid of Covid’ has drawn significant criticism and may have hurt his re-election chances.
Next US stimulus package unlikely before election
Another key influence on markets in recent weeks has been renewed hopes for a new US stimulus package, following high-level talks between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin.
Hopes for a major package helping to shore up the US economic and aid the global recovery helped to boost market risk sentiment at the expense of the US dollar.
However, this optimism was torpedoed by a recently recovered Trump, following a tweet in which he called for an immediate halt to stimulus talks, triggering a sell-off in equity markets and boosting the US dollar.
‘I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.’
While Trump has since sought to revive talks, his administration’s $1.8 trillion stimulus offer was rejected by Pelosi, with the US dollar surging amidst the diminishing prospect of an agreement being reached before the election.
Despite talks continuing between Pelosi and Mnuchin, the chance of an agreement hangs in the balance as Republican senators appear at odds with the Trump administration, as well as Democrats on the stimulus package.
Biden storms ahead in the polls
While Trump has faced some setbacks in recent weeks, it appears that Joe Biden is going from strength-to-strength, with recent polls consistently pointing to a double-digit lead for the Democratic presidential nominee.
In fact, the latest Opinium poll suggests Biden commands a 17-point lead over Trump as the US election enters its final stretch.
As such, there is now significant speculation on what a landslide victory could mean for the US economy and broader markets.
Analysts suggest a ‘blue wave’, in which the Democrats manage to sweep the Senate and win the presidency, could undermine the US dollar.
This can partially be attributed to market’s general distaste for anything which upsets the status quo, but also the expectation a Democrat government is likely to increase corporate taxes to help fund new spending initiatives.
Extended political uncertainty to stoke considerable USD volatility into 2021
Traditionally, we would expect to see the US dollar gradually strengthen in the months following the election.
However, with a huge increase in postal voting this year as a result of the coronavirus pandemic, the final result may not be known for a week or more after the election date, during which we are likely to see heightened volatility in the US dollar.
On top of this, Trump’s repeated claims on voter fraud have potential to lead to a long drawn out legal battle and disorderly handover which would infuse even greater volatility into USD exchange rates.
Coronavirus concerns to continue influencing USD exchange rates
While the election has started to draw greater attention from investors, growing concerns over a second wave of coronavirus infections and the impact on the global economy will undoubtedly continue influencing USD dynamics in the weeks to come.
Europe’s coronavirus woes are particularly worrying as ever stricter restrictions and the threat of a second lockdown in many countries stokes concern over the potential impact on global growth.
These concerns may underpin the US dollar through the winter, potentially limiting the downside risk of a contested election result.
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