Elections can create a lot of market volatility, both before and after they’ve taken place. Markets thrive on stability, and elections bring a lot of uncertainty. Whether it’s speculation around potential policy shifts, changes in trade relations, or the broader economic outlook, with lots of variables in an election, it’s no surprise currency movements can be significant. In this article, we’ll explore how electoral outcomes could influence the US dollar and what that could mean for your business.
Policy Uncertainty and its Effect on Currency Market Sentiment
Policy changes create uncertainty for an economy, and so investors might seek other assets until an election (and the effects it creates) has passed. For instance, if political party candidates suggest changes that could harm the economy, investor sentiment could decrease, and the respective currency could depreciate. Examples of uncertainty could stem from significant trade policy changes, tax regulation changes, or corporate governance adjustments. It’s worth noting that if a candidate very focused on business were to win, the respective currency could rise as investors anticipate a more positive upswing for the economy.
Economic Strategies and Government Spending
Investors are often very interested in two elements of a political party’s economic strategy: fiscal policy and monetary policy.
Fiscal policy that includes more government spending or the lowering of taxes can result in inflationary pressures and contribute towards a weaker currency. However, a government that wants to take a more cautious approach to spending could help a currency rise as it can signal long-term financial stability.
Meanwhile, monetary policy can also be influenced. In the case of the US, while the Federal Reserve is independent, it has to react to the decisions and the consequences of other economic policies. For instance, higher inflation levels could result in interest rate hikes to try to keep consumer prices in check. An interest rate hike is often seen as a positive for a nation’s respective currency and could, therefore, allow the US dollar to strengthen as foreign investors look for higher returns.
A Government’s Foreign Relations
Different candidates may approach international relations differently, meaning trade agreements, tariffs, and other aspects could all differ with different parties. A President who encourages positive international trade relations and builds stronger bonds with other countries could be seen as positive for the US dollar.
The 2016 US Election and the US Dollar Movement
Let’s take a look at a previous election to see the impact it had on the US dollar.
In the run-up to the November 8, 2016, US election, the US dollar gained ground as expectations rose around the impact President Trump would have on fiscal stimulus. The US dollar index (DXY), the trade-weighted measure of the currency against a basket of other majors, rose between 94.16 in August to 102.00* in mid-December, approximately 7%.
The election’s effect on the GBP/USD currency pair was also significant in the lead-up. In September 2016, GBP/USD reached interbank levels of 1.3426 but dipped to around 1.2212 by the start of November*.
How can we Help You Move Money during the US Election?
If you want to make an international foreign currency transfer before or after an election, speak to one of our team. We have a wealth of market experience during major political events and can help you make an FX transaction, even during times of market volatility. Speak to the team, here.
If you’d like a free FX review, or have questions about how we could help your business with its foreign currency requirements, please get in touch.
*Currency source: Yahoo Finance