The Future of the US Dollar After the 2020 Election

Tuesday, Nov. 3, 2020 marks one of the more memorable Election Day contests in U.S. history. Featuring an outspoken incumbent POTUS, a former Vice President, and an unprecedented series of geopolitical and social events, Election Day 2020 will have a profound influence on financial markets around the world. Among the most heavily impacted assets could be the United States dollar (USD).

So, how will the greenback fare after Election Day 2020? The answer to that question depends upon the pending COVID-19 economic recovery, central banking policy, and, of course, the final tally come November 3^rd.

The US Dollar After an Election

2020 has been a historic year for the US dollar, with uncertainty being the only rule governing valuations. During the onset of the novel coronavirus (COVID-19) pandemic, the USD became the world’s premier “safe haven” asset. In mid-March, the USD Index (DXY) spiked above 104.00 to heights not seen since 2002.

The mass capitulation that followed the COVID-19 outbreak created a liquidity crunch―one that was quickly addressed by the United States Federal Reserve (Fed). In an aggressive series of policy moves, the Jerome Powell-led central bank launched an unlimited Quantitative Easing (QE) program.

Under unlimited QE, the benchmark Federal Funds Target rate was cut to 0.00-0.25% indefinitely and the FED vowed to purchase an “unlimited” amount of U.S. Treasuries as well as mortgage-backed securities. Over the course of the summer months, the historic injection of liquidity set the stage for a slumping USD.

Given the implementation of unlimited QE, where will the US dollar stand after Election Day 2020? Currency market specialists predict a variety of eventual scenarios, from strong to weak. However, given the presence of heightened electoral, societal, and COVID-19 uncertainty, there’s significant guesswork involved with accurately predicting what the US dollar will look like after the election.

Post-Election USD: Strong or Weak?

When it comes to projecting the USD’s post-election value, there is a philosophical divide between the banking industry and market analysts. Ultimately, the arguments around the US dollar rate after the election fall into one of two categories:

Stronger

Most major banks are projecting the USD to finish 2020 on a stronger note, at least compared to the world’s other major currencies. This prediction is based upon three issues:

●      hopes that the US economy will lead the COVID-19 global recovery,

●      political risks will ease post-election day,

●      and the Fed will eventually relax its aggressive QE policies.

If these factors develop as expected, the value of the dollar after elections this fall may increase versus its major rivals.

Weaker

A common theme among currency market experts is that the USD is likely to lose market share no matter the outcome of the 2020 election. According to data compiled by BCA Research, growing U.S. income inequality and lagging social mobility have led to increased populism and civil unrest. These two factors prompted BCA’s geopolitical strategist Matt Gertken to state that “the market is waking up to the fact that Trump and the Republicans have a much greater chance of entirely losing control of the government.” In addition, Gertken predicts that “the market is reacting to stimulus now...but policies look to turn a lot tougher on business,” regardless of which party wins in November.

Essentially, the strong vs. weak USD discussion boils down to political and COVID-19 uncertainty. No matter which side you’re on, Fed policy, social unrest, and political turnover are poised to play key roles in the value of the US dollar after Election 2020.

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The COVID-19 Question

Over the course of 2020, the COVID-19 pandemic has been the quintessential, if unexpected, forex market driver. From periodic rallies in safe haven pairs such as the USD/CHF and USD/JPY to a short-term exodus from the USD itself, the pandemic has raised uncertainty to epic proportions.

Perhaps the greatest impact that COVID-19 will have is on the outcome of November’s US presidential election. The effects of the pandemic have been widespread, creating dramatic economic fallout and increased social unrest.

To address this phenomenon, BCA Research has developed its own set of COVID-19 Social Unrest Rankings. The rankings are based on related factors such as initial economic conditions, healthcare capacity, the Gini and Misery Index, as well as the likelihood of political instability. BCA’s COVID-19 Social Unrest Rankings place the United States in 12^th place, last behind Greece, Spain, and Italy. Sweden, Germany, and Korea took the top 3 spots, respectively, while China was excluded from the survey.

COVID-19 will play a key role in Decision 2020 and the state of the US dollar after Election Day. Ultimately, enhanced uncertainty stemming from pandemic-sparked economic and social unrest may entice investors to sell the US dollar. However, if sweeping U.S. government stimulus packages such as the CARES Act prove successful, a strong recovery may boost the USD toward the end of Q4 2020.

Conclusion

By New Year’s Eve 2020, the calendar year will have seen several landmark political, economic, and societal events. Namely, the U.S. has faced a hot trade war with China, an unrivaled COVID-19 economic downturn, widespread social unrest, and a presidential election. If nothing else, these items have factored into historically high levels of capital market uncertainty.

Nonetheless, many experts project a positive US dollar after the election becomes final. For example, predictions from BCA strategist Matt Gerken allude to “investors fleeing to the dollar in the event of any global crisis, even if it originates in the United States.” So, while there is much angst surrounding the greenback, it is still positioned as a go-to safe haven for investors around the globe.

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