With the
US presidential election drawing closer, the question of which outcome would be
better for the global economy is gaining urgency. Both sides have their sound
strategies, but let’s focus on the impact on the dollar by taking a
closer look at the dollar index chart.
Analysts
suggest that a Trump victory would be a more bullish scenario for the dollar,
while a Biden re-election is seen as more neutral. Overall, the dollar is
expected to continue strengthening against major currencies ahead of the US
presidential election and depreciate afterward.
Why is
the former president beneficial to the dollar?
Donald
Trump reportedly considers imposing new trade restrictions with the EU if he
returns to the White House, essentially reigniting the trade wars.
This
includes the introduction of a minimum 10% tariff and countermeasures against
European taxes on digital services. In addition, he promises substantial
tariffs that could significantly affect trade with China.
Biden,
for his part, has already prepared new restrictions against China, which the
administration is ready to implement before the elections. Overall, the trend
towards protectionism has only just begun.
But what
about the Federal Reserve’s possible interest rate cut?
Amid continuing tensions in the Middle East and the
reluctance of the parties to agree on a peace plan, businesses face rising
logistics costs.
This
increase in transport costs is likely to be reflected in the prices of consumer
goods in the future. In this context, the regulator seems hesitant to address
the issue with an early rate cut.
For
instance, Atlanta Fed President Raphael Bostic, who is voting on the Federal
Open Market Committee’s policy decisions this year, suggests that the first
move might come sometime in the summertime.
However,
two factors could force the regulator to reconsider its stance. First, as has
been repeatedly pointed out, keeping rates at a high level affects not only the
population but also the commercial real estate market and regional banks.
As a
result, the latter’s paper losses have soared again to record levels. If
investors start withdrawing money, as they did last year, a banking crisis
could resume.
To avoid
this scenario, the regulator is likely to initially resort to printing more
money and may have to consider a sudden rate cut if that is not enough.
The
second potential pressure factor is the labor market. Officially, January’s
monthly employment report surprised economists with creating 353,000 new jobs, well above expectations.
However,
every month, there are reports of massive layoffs in various companies. Perhaps
some of the newly unemployed are not being considered, and not everything is as
rosy as it seems.
What
should traders do?
Frankly
speaking, it is impossible to be ready for every scenario, so it is more
reasonable to act depending on the developments, keeping an eye on
macroeconomic indicators and pre-election polls.