The US presidential election has the world watching. Its result can have a significant impact not only in the United States but across international markets.
A major outcome of one of the world’s most famous political contests is its impact on the value of the US dollar (USD).
Currency markets are vulnerable throughout the election process, from the start of presidential campaigns to the outcome of the vote.
With the 2024 election between Donald Trump and Kamala Harris fast approaching, and polls suggesting a tight race, it’s important to understand how the anticipation and eventual result will impact currency markets.
In this article, we’ll explore how previous US elections have affected the dollar, the crucial economic policies of each candidate, and what businesses must look out for in terms of currency volatility and trends.
Table of contents
- Historical impact of the US elections on the dollar
- What could affect the dollar following the 2024 election?
- What to expect for the dollar in the 2024 US election
- How businesses can prepare for dollar volatility
- Specialist insights on the dollar’s reaction to the 2024 US election
- Conclusion: what could the 2024 US election mean for the dollar?
- 10 FAQs about how US elections affect the dollar
Historical impact of US elections on the dollar
Historically, US elections have spooked financial markets. The uncertainty they create often leads to sudden, sharp swings in the value of the dollar.
Mainly, this is due to investors resetting their expectations for economic policy, trade relations, and government spending based on the likely winner.
2008 election: Obama vs McCain
The 2008 US election took place during the financial crisis – one of the most significant economical black swan events of all time.
This put currency markets on edge, making them fragile to other major events.
Barack Obama’s victory initially led to a weaker dollar, as markets anticipated increased government spending on stimulus packages and regulatory reforms.
The government’s boosted spending highlighted the dire need to support the US’s financial situation following the financial crisis.
Higher spending and borrowing may have led to fears about raising US debt which can put pressure on a country’s currency.
Similarly, this kind of government financial support often means interest rates are likely to stay lower for longer – which commonly weighs on a currency’s value.
By early 2009, Obama’s policies became clearer. The dollar started to stabilise and responded to the more settled, predictable fiscal and monetary policy outlook.
2016 election: Trump vs Clinton
The 2016 election, which saw Donald Trump defeat Hillary Clinton, had an immediate and surprising effect on the dollar. In the lead-up to the election, the dollar weakened on expectations that a Trump victory would bring policy uncertainty.
However, once elected, Trump’s promises of corporate tax cuts and deregulation drove the dollar higher, as markets anticipated stronger economic growth and inflationary pressures.
The potential for higher inflation increased the likelihood of the Federal Reserve (the Fed) raising interest rates. Higher interest rates are typically positive for a nation’s currency as investor seek higher returns on their investments.
2020 election: Biden vs Trump
In 2020, Joe Biden’s victory over Trump led to a weaker dollar initially. Mainly, this was driven by expectations of increased fiscal stimulus and a decreased likelihood of the Fed cutting interest rates. Typically, both expectations put downward pressure on a currency’s value.
The dollar, however, began to recover as Biden’s policies around economic recovery and infrastructure investment started taking shape.
What could affect the dollar following the 2024 election?
The outcome of the 2024 election between Donald Trump and Kamala Harris could lead to significant movements in the dollar based on the following factors:
Fiscal policy and government spending
The dollar’s performance will be heavily influenced by the fiscal policies proposed by each candidate. Fiscal policies refer to the way governments use spending and taxation to influence the economy.
Trump is expected to push for reduced taxes and deregulation, similar to his 2016 campaign, which could boost the dollar by increasing growth expectations.
Harris, on the other hand, may focus on higher government spending on social programmes and infrastructure, which could initially weaken the dollar through fears of increased debt levels.
Trade relations and tariffs
The trade policies between the two candidates are also likely to have an effect on the dollar.
Trump’s “America First” approach could lead to trade disputes. If he continues with similar trade tariffs, such as those placed on China during his previous time as president, the dollar may suffer in the short term due to increased uncertainty and the potential for geopolitical unrest.
Harris is expected to take a more globalist stance, potentially strengthening the dollar if international trade relations improve.
Monetary policy and the Federal Reserve
Both candidates’ fiscal approaches will influence the Fed’s monetary policy. This refers to the way the Fed treats interest rates.
Trump’s tax cuts, including his recent announcement that he’ll remove double taxation for US expats could lead to inflationary pressures. Higher inflation may lead to the Fed raising interest rates, which typically strengthens the dollar.
Harris’s policies, if they lead to slower growth, could result in a more relaxed approach from the Fed.
We might see interest rates kept lower for longer, with the Fed continuing the rate cuts we’ve seen so far in 2024. Such an approach may put downward pressure on the dollar.
What to expect for the dollar in the 2024 US election
Given the close nature of the 2024 race between Trump and Harris, it’s difficult to predict exactly how the dollar will react.
However, we can expect initial volatility as markets respond to polling data, campaign promises, and policy announcements.
If Trump wins
Markets might initially respond with a stronger dollar, especially if he continues with his commitment to tax cuts and deregulation.
However, any aggressive statements or actions around trade tariffs could introduce uncertainty and weigh on the dollar’s strength longer term.
If Harris wins
The dollar might see a short-term dip as markets digest potential increases in government spending and a softer stance on trade.
In the medium to long term, however, a Harris victory could lead to a more stable dollar if international relations improve and government investment lifts economic growth.
How businesses can prepare for dollar volatility
As we approach the 2024 election, businesses that deal in USD should prepare for potential swings in the currency’s value. Here are some strategies to consider:
Hedging currency risk
While it’s impossible to predict where the dollar markets will move, it is possible to manage their risks.
By using a variety of foreign exchange (FX) products, such as forward contracts, businesses can protect their profit margins from swings in currency values.
Forward contracts allow a business like yours to secure a rate of exchange for transaction at a later date. Let’s look at an example.
Let’s say today’s dollar to euro rate is 0.91 – a favourable rate for your business. However, the crucial invoices you need to pay aren’t for another 12 months.
With a forward contract, you can lock-in today’s favourable rate of 0.91 but won’t have to exchange currencies until your invoices need settling.
This adds a degree of certainty to your currency costs, helping you protect against risk and budget with confidence.
Monitoring market sentiment
Keeping an eye on market expectations and sentiment can provide insights into potential dollar trends.
As we mentioned above, knowing exactly where the dollar markets will go is impossible. However, keeping up to date with the latest in the US electoral campaign, and how markets are viewing each candidate, can help you gain a better understanding of how the dollar could react.
Alternatively, you could leave all of this up to us. At Privalgo, our currency specialists are constantly keeping an eye on currency markets and the US election news surrounding them.
They can offer guidance on how and when to use hedging strategies to help your business manage FX risk.
Fill in the form below to speak with a Privalgo Currency Specialist and learn how we can help your business protect your profit margins with FX risk management strategies.
Specialist insights on the dollar’s reaction to the 2024 US election
“The upcoming US presidential election is likely to trigger significant movement in currency markets, with potential volatility in the US dollar against major currencies such as the euro and pound,” says Matt Clarke, Chief Revenue Officer at Privalgo.
“As currency specialists, we anticipate some initial fluctuations in exchange rates as the market digests these policies. This could have immediate implications for both businesses and consumers engaged in international transactions.”
Businesses and consumers alike should be prepared for potential currency fluctuations in the wake of the election results.
Matt further adds that “businesses would be wise to consider hedging strategies to mitigate exchange rate risks.
“Consumers planning significant foreign currency transactions might want to keep a close eye on exchange rates and consider locking in rates if they’re favourable.”
While initial volatility is likely, if the election result is considered to be positive for long-term economic growth and stability, we could see a gradual strengthening of the dollar against major currencies over time.
Conclusion: what could the 2024 US election mean for the dollar?
The tightly contested 2024 US election between Donald Trump and Kamala Harris has the potential to create significant fluctuations in the dollar, depending on who wins and the fiscal and monetary policies they promote.
Regardless of the outcome, businesses engaged in international trade should prepare for possible swings.
Through effective FX risk management strategies and a keen attention to market sentiment, businesses can navigate the upcoming election with confidence, safeguarding their bottom line against the impacts of currency volatility.
For more information on how to protect your business against currency risk, fill out the form below to speak to a Privalgo Currency Specialist.
10 FAQs about how US elections affect the dollar
Below are 10 FAQs about how US elections affect the dollar. Some include information already featured in this article.
How do US elections impact the value of the dollar?
US elections often introduce uncertainty into financial markets, which can cause volatility in the dollar’s value.
Depending on the winning candidate’s policies on taxes, government spending, and trade relations, the dollar can either strengthen or weaken. Investors adjust their expectations, making currency markets highly sensitive during election periods.
Why do currency markets fluctuate during US elections?
Currency markets fluctuate during US elections because of the uncertainty surrounding potential changes in fiscal policy, trade relations, and monetary policy.
Investors tend to react to how they think a candidate’s policies will impact economic growth, inflation, and interest rates, which in turn influences the value of the dollar.
What was the impact of the 2016 US election on the dollar?
In the lead-up to the 2016 election, the dollar weakened due to uncertainty about Donald Trump’s policies. However, after his victory, promises of corporate tax cuts and deregulation boosted confidence in economic growth, strengthening the dollar.
How did Barack Obama’s election in 2008 affect the dollar?
After Barack Obama’s 2008 election victory, the dollar initially weakened as markets anticipated higher government spending on stimulus packages to address the financial crisis. However, as his economic policies became clearer, the dollar began to stabilise.
What could happen to the dollar if Donald Trump wins the 2024 US election?
If Donald Trump wins the 2024 election, the dollar might strengthen initially, especially if markets anticipate tax cuts and deregulation similar to his 2016 campaign.
However, his trade policies, such as potential tariffs, could introduce uncertainty, weighing on the dollar’s performance in the medium term.
How might a Kamala Harris victory in the 2024 US election affect the dollar?
A Kamala Harris victory could initially weaken the dollar due to expectations of higher government spending on social programmes and infrastructure, which may raise concerns over increased debt.
However, if her policies are seen to boost long-term economic growth and international relations, the dollar could stabilise or strengthen in the longer term.
What are the key factors influencing the dollar during US elections?
Key factors that influence the dollar during US elections include each candidate’s fiscal policies, trade relations, government spending plans, and how these policies impact the Federal Reserve’s decisions on interest rates. Uncertainty during the election process can also lead to market volatility.
How can businesses protect themselves from currency fluctuations during US elections?
Businesses can protect themselves from dollar volatility during elections by using foreign exchange (FX) hedging strategies, including products such as forward contracts.
These tools allow companies to lock in exchange rates, providing budget certainty and mitigating the risks of currency swings.
What role does the Federal Reserve play in how US elections affect the dollar?
The Federal Reserve’s monetary policy decisions, including interest rate changes, play a crucial role in how US elections affect the dollar.
If a candidate’s policies are expected to lead to inflation or slower economic growth, the Fed might adjust rates, which influences the dollar’s value.
Does the US election affect international businesses trading in US dollars?
Yes, US elections can significantly impact international businesses that trade in US dollars.
A stronger or weaker dollar can influence import and export costs, profit margins, and overall business performance, making it essential for companies to monitor election outcomes and consider currency risk management strategies.
