Despite conventional wisdom dictating that a Republican president is better for the US Dollar (USD), OCBC FX strategist Terence Wu observes that a Democratic victory may not be as USD-negative as one might think. A Biden victory in the November Presidential elections paired with a Republican senate, he says, will prove the best case scenario for the greenback.
The assumption that a Republican president is better for the USD stems from the GOP’s reputation for better fiscal management and foreign policy hawkishness. The latter is particularly key in the presently uncertain geopolitical landscape, where US-China tensions have reached their lowest point in decades. US macroeconomic outperformance due to better economic management coupled with a flight to safety from geopolitical uncertainty, so the logic goes, could see a second Trump administration prove a net positive for the US Dollar.
But market history shows that such assumptions are largely a myth. “Looking back at the movement of the trade-weighted USD in the 90 days after each of the last 10 elections suggests no systematic advantage for the USD under a Republican president,” declares Wu, who notes that 30- and 60-day time horizon studies yield a similar conclusion.
“If anything, on a 90-day horizon, the lifting of any political risk premium due to a reduction in uncertainty post-election tends to be a marginal USD-positive driver,” continues the strategist. Any correlation between the political alignment of the president and greenback performance breaks down over a longer time horizon between 6 to 24 months. The political inclination of the newly-elected US president, it seems, is not very reliable in predicting USD performance.
Wu’s preferred approach is to instead analyse which candidate best addresses near-term USD negatives. Besides a resurgence in Covid-19 cases, the US government’s inability to pass swift fiscal relief measures have also been a drag on the greenback. The European Union’s swift relief package, remarks Wu, was a game-changer in protecting the US economy from the ravages of the Covid-19 recession.
The OCBC strategist observes that based on current polling, there could be a good chance of the Democrats taking control of the senate in November, with the House of Representatives safely under Democratic control for now. “Thus, at least in the near term, the ability of a Biden administration to work through the Congress and obtain a new fiscal stimulus package for the US appears to be higher than a second Trump administration,” Wu comments, though he acknowledges the potential for a negative market shock should a “blue wave” occur.
Wu’s optimal scenario, therefore, is a Biden presidency coupled with a razor thin Republican majority in the upper house. The hope is that the politically-savvy Biden -- famed for his legislative wheeling and dealing -- will be able to reach across the aisle and convince some Republicans to support short-term fiscal packages. Bringing such a compromise into fruition could see Biden concede more radical Democratic policies like tax hikes in return.
But ultimately, it is difficult to make more long-term forecasts about the prospects for the US Dollar. These depend on more politically hazy issues such as Biden’s stance on tariffs and tax policies. Whether a Biden victory will see stronger USD performance in the long-run is therefore too soon to say.
