Dollar Outlook as Election Nears

October 12, 2020

2020 has been a difficult year for America’s brand of democracy. Amid doubts that democratic practices can be relied upon to forge policies in the best common interests of the citizenry or even whether the people still want sovereignty to be vested in the people, the dollar’s main basis of support lies in its centrality within the existing international monetary system. It has held such a role since 1945, and the framework of a post-dollar world is still way out of focus.

Within a health pandemic that perpetuates significant potential downside risks to the global economy, it was thought earlier this year that the dollar would benefit from waves of  risk aversion. However, that has not been the mood of financial markets, even after new U.S. and global coronavirus cases began picking up in June. Share prices rose in the summer, and the dollar experienced a weak third quarter, falling 4.2% against the euro, 4.0% versus sterling, 3.7% relative to the Australian dollar, 2.9% vis-a-vis the yuan, 2.3% against the yen and 1.9% relative to the Canadian dollar. Investor tolerance for risk has remained firm in the early going of October, a month that has seen its share of confidence crises in past years.

The 2020 U.S. election three weeks away is fraught with uncertainty best portrayed by the many crucial questions that cannot be answered yet. When will the presidential winner become apparent, and will that person’s opponent concede? Will violence be avoided? Will voters decide the election as intended, or will the decision be placed in the hands of the Supreme Court, House of Representatives, or state legislatures? Opinion polls continue to give Biden a lead closer to 10% than 5%. One can imagine Biden winning as much as 6 percentage points more of the popular vote than Trump but still losing the electoral college count. Such an outcome appears dubious above the 6-percentage point threshold.

More is at stake than the presidency. The Democrats almost certainly will retain control of the House of Representatives, but the controller of the next Senate faces much closer odds. If Trump pulls off an unexpected win as he did in 2016, the Republicans will most likely retain control of Congress’s upper chamber, and Trump will waste scant time amassing considerably more power and initiating legal action against his political adversaries. If Trump loses, the transition period is apt to abandon the norms observed in previous White House transitions. Why would the transition adopt a cooperative and respectful approach after a four-year presidency whose greatest consistency could be found in breaking all the rules and traditions of past administrations? Unless a fiscal package is approved before the election, the lame duck congress probably will be unable to do so afterward.

Most of scenarios that the period between November 4, 2020 and January 20, 2021 could conceivably follow point to a continuing high level of melodrama. Unless a fiscal package is approved before the election, the lame duck congress probably will be unable to do so afterward. Covid cases are unlikely to turn downward much if at all, and deaths probably will rise because they tend to lag shifts in the trend of cases. Treatments and vaccines will not restore consumer and business confidence in an enduring way until wide distribution to the public is available. Federal Reserve policy will remain extremely accommodative and friendly to riskier assets.

In the 10-plus transition weeks that followed the 2016 election, the dollar rose 4.0% against the euro and 8.9% relative to the yen. The balance of risks this time suggests a weaker trajectory than that time. In Obama’s transition eight years earlier, the dollar edged up 0.3% against the euro but fell 9.0% versus the yen. That period overlapped with a severe segment of the Great Recession, and both the outgoing Bush administration and incoming Obama team shared a common purpose of implementing policies to counter the downturn.

If one considers the last five elections that resulted in a new president (2016, 2008, 2000, 1992, and 1988), the aforementioned dollar changes against the yen of +8.9% in 2016 and -9.0% in 2008 represent the U.S. currency’s biggest rise and largest drop against either the yen or Euro (DEM for both 1992 and 1988) from all transitional periods. The biggest rise against the euro in those transitions was the 4.0% gain after the 2016 election, and the biggest drop against the euro was 5.3% after the 2000 election. That was the previous time when the winner was decided by the Supreme Court and not known for more than a month after the election.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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