While Citi strategists have emphasized the U.S. election as being “USD positive,” there are multiple factors at play that could affect the dollar in the coming months. Trade and tariff policies, in particular, are expected to be significant drivers of a bullish USD outlook, especially if increased tariffs, particularly targeting China, are implemented. This could strengthen the dollar and have a particularly vulnerable impact on currencies such as the Chinese yuan, euro, Mexican peso, Taiwanese dollar, and Thai baht.
Citi has outlined various election scenarios, with differing implications for the dollar. The “red wave” scenario, where Trump wins and Republicans gain control of both chambers of Congress, is seen as the most USD positive. In this case, a focus on improving the trade deficit through tariffs and potentially implementing fiscal expansion measures, such as tax cuts and deregulation, could further boost the dollar. However, there is a ceiling to how much the USD could rally based solely on election risk due to other current factors affecting the greenback.
Market participants typically begin to trade election themes two to three months ahead of the event, with U.S. presidential debates in September acting as a key point for markets to start seriously pricing in election outcomes. Any USD strength related to the election is expected to be priced in well before November, potentially reaching its peak around that time. This suggests that the election could be a “sell the news” event for the USD and for volatility.
While the election is a significant consideration, there are other factors that will continue to impact the dollar in the coming months. Federal Reserve policy, particularly the path of interest rates, and broader macroeconomic conditions, including the possibility of a U.S. recession, will also play a role in influencing the dollar alongside election risks. In addition, global economic developments, such as the slowdown in manufacturing and economic challenges in Europe and China, could further impact the dollar.
While the U.S. election is expected to have a significant impact on the dollar, it is crucial to consider the broader economic landscape and other influential factors that could shape the currency’s performance in the coming months. Traders and investors should remain vigilant and adaptive to the evolving market conditions to navigate the potential fluctuations in the value of the dollar.