Democratic presidential nominee Joe Biden could end up getting the weak dollar that President Donald Trump craved for much of his first term in office.
Higher taxes, a soothing of tensions with China and a tamer Wall Street would all likely weigh on the dollar if Biden won the White House in November, although that could be tempered by a big fiscal stimulus, foreign exchange analysts told S&P Global Market Intelligence.
A weaker dollar would make U.S. exports cheaper, potentially providing a boost to the U.S. economy and narrowing its yawning trade deficit. However, if it falls too far or too quickly, it may amplify the voices that have called into question the dollar's primacy as the world's reserve currency.
"If you take that difference in approach to China ... just on that simple factor alone, ignoring everything else, you would argue that a Biden presidency would imply a weaker dollar than a Trump presidency," Derek Halpenny, head of research for global markets at MUFG, said in an interview. "There are lots of unknowns."
The Dollar Index, a gauge of the currency against a basket of its developed-market peers, rose 2.1% from Trump's inauguration day in January 2017 through March 20, 2020, when it closed at a more than three-year high.
Trump spent much of the past three years bemoaning the strength of the dollar, concerned that it was damaging U.S. exports, before switching his position in March and declaring in an interview with Fox Business News: "It's a great time to have a strong dollar. ... Everybody wants to be in the dollar because we kept it strong. I kept it strong."
However, since that March 20 high, it has weakened precipitously, falling 9.8% through Sept. 18.
Halpenny believes the most bearish outcome for the U.S. dollar will be for Biden to win and Democrats to sweep the House and Senate, allowing for rollback of tax cuts and imposition of new restrictions on Wall Street. A Trump win, paired with Republican victories in the House and Senate, could strengthen the dollar as the GOP pushes for additional tax cuts and a more aggressive trade war with China.
A President Biden would also likely take a more conciliatory stance on trade with China than Trump, tone down the trade war and impose far fewer tariffs, which contributed to the rise of the U.S. dollar in mid-2018.
With less expansionary fiscal policies than Trump's, less aggressive foreign and trade policies from Biden could allow cyclical currencies to further rebound, said Chris Turner, global head of markets with ING.
The strong dollar in 2018 and 2019 was driven, Turner said, by the corporate tax cut passed by Trump and congressional Republicans and protectionist trade policies. But if Republicans are unable to win Congress in November, a Trump presidency may do little to strengthen the dollar.
"Trump's America First protectionism is seen as a dollar positive and negative for the rest of the world," Turner said. "But it's not clear how aggressive he will be on trade if he doesn't have a tax cut and Congress to back him up."
Control of Congress could also have a big impact under a Biden victory. If both the House and the Senate are Democratic after the election and the economy is still reeling from COVID-19, Biden could support a large fiscal stimulus similar to the $3 trillion package House Democrats passed in May. That could potentially be dollar positive, Halpenny said.
History suggests that a Democrat in the White House is good for the dollar.
In June, SEB released a study of the impact of U.S. presidential elections on the dollar which found that, on average, the U.S. Dollar Index appreciated by about 4% following the win of Democrat candidates against 2% for Republican in the 100 days following an election.
A Biden victory would be the "best possible outcome" for the dollar, according to the study.
"It would then be a Democrat candidate winning his first term, both being positive factors for the [dollar] in the past," the study states. "However, in this case the election would then be preceded by some [dollar] weakness in the coming months. We'll soon find out if history repeats itself."
Lauri Hälikkä, a fixed-income and currency strategist with SEB Group, said a Biden victory could cause some near-term strength which would quickly erode back to the currency's status quo.
"Our main conclusion regarding the early November election outcome is that it will increase volatility temporarily and possibly erode risk appetite, leading to the stronger dollar," Hälikkä said. "The stronger [dollar] is likely to be temporary though, with the dollar probably starting to weaken again one to two months after inauguration in case Biden wins and somewhat earlier if Trump wins."
However, the biggest factor weighing on the dollar is out of the hands of either of the candidates: monetary policy.
With the Federal Reserve keeping interest rates close to zero and implementing an open-ended bond-buying program, the dollar could remain on the back foot for a while as investors go searching for yield elsewhere.
"I don't think the dollar reacts either way to politics, as the Fed's ultradovish stance is likely to be the key driver for now," said Win Thin, global head of currency strategy at Brown Brothers Harriman.