City strategists on Thursday reiterated their view that the US election is ‘positive for the US dollar’, while acknowledging other factors that could have an impact in the coming months, such as Federal Reserve policy, recession risks, and global economic conditions.
According to Citi, trade policies and tariffs are expected to be the main driver of the US dollar’s bullish forecast related to the elections. Specifically, the prospect of higher tariffs, particularly those targeting China, is seen as a key factor that could strengthen the dollar.
Strategists highlighted currencies such as the Chinese yuan (USD/CNY), EUR/USD, MEXICOS (USD/MXN), TWD/USD and THB/USD as particularly vulnerable.
However, the macroeconomic landscape remains uncertain, and other stimuli may become more influential.
Citibank outlines different election scenarios, with different effects on the dollar. The ‘red wave’ scenario, where Trump wins and Republicans gain control of both houses of Congress, is seen as the most positive for the US dollar. In this case, Citibank expects to focus on improving the trade deficit through tariffs and possibly some fiscal expansion through further tax cuts and deregulation.
“So we find that this represents a fixed market premium for the red wave. However, we see 5% as a cap on how high the US dollar is on election risk alone given other factors currently affecting the USD,” Citibank’s note said.
The report also notes that market participants usually start trading election topics two to three months before the event, with the US presidential debates in September being a key point for markets to start pricing election results more seriously.
Strategic analysts predict that any election-related strength of the U.S. dollar is likely to be priced well before November, with the dollar likely to peak around that time.
Read also:U.S. Dollar Rises on Strong Economic Growth Data
“This suggests that the election will be a ‘news-selling’ event for the US dollar and for fluctuations,” they add.
They also point out that other factors will remain important for the dollar in the coming months. Federal Reserve policy, particularly the trajectory of interest rates, and broader macroeconomic conditions, including the possibility of a recession in the US, will affect the dollar along with election risks.
Moreover, global economic developments, such as slowing industrialization and economic challenges in Europe and China, may also have an impact.
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