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The U.S. dollar has been on a notable upward trend in the lead-up to the November 5th presidential election, registering its third consecutive week of gains. The Dollar Index, which measures the greenback’s strength against a basket of major currencies, has achieved its longest winning streak since the 1970s, climbing for fourteen consecutive trading days. This strong performance highlights the dollar’s resilience in the face of political and economic uncertainty. Over the past few weeks, the dollar has appreciated by 3.5%, showing particularly pronounced strength against currencies like the New Zealand Dollar (NZD) and the Japanese Yen (JPY), which have fallen 4.3% and 4.2% against the dollar, respectively.
DXY Chart H4
Trump’s Re-election Momentum Fuels Dollar Rally
A significant factor driving the dollar’s surge is the growing market perception that Donald Trump may secure a second term in office. This sentiment has been bolstered by recent betting market data from platforms like PolyMarket, where Trump’s re-election odds have climbed past 60%. This shift in market expectations stems from his improving performance in key battleground states and the narrowing gap in opinion polls between Trump and his opponent, Kamala Harris. Despite Harris still leading in national polls, the electoral college dynamics indicate a tightening race, creating uncertainty that is reflected in currency markets.
PolyMarket Election
The USD’s rise reflects a "Trump risk premium" as investors begin to factor in the potential impact of a second Trump presidency. Historically, Trump’s policies on trade, deregulation, and economic nationalism have introduced volatility into global markets. Under his administration, policies such as tariffs on Chinese goods and a renegotiation of NAFTA (replaced by the USMCA) disrupted global supply chains and currency flows. This risk premium suggests that markets anticipate renewed volatility in global trade relations, should Trump win re-election. I’ve made a video discussing a bit more in-depth about trump winning and what could happen on the market if he actually wins, you can find this video here:
The USD/MXN pair, a barometer of U.S.-Mexico trade relations, has already climbed to the 20.00-level. The Mexican Peso’s sensitivity to U.S. political shifts reflects concerns about potential changes in trade policies or tariffs that could emerge under another Trump administration. The dollar’s strength in this context may be seen as a hedge against policy uncertainty, which could otherwise weaken emerging market currencies like the MXN.
USDMXM H1 Chart
Diverging Monetary Policies Support the Dollar’s Ascent
In addition to election-related factors, the U.S. dollar’s strength can also be attributed to a growing divergence in monetary policy between the Federal Reserve and other major central banks. While the Fed has signalled a potential slowdown in the pace of its interest rate cuts, delivering a modest 25 basis points (bps) reduction at its next meeting (07/11/2024), other central banks have pursued more aggressive easing measures.
CME FEDWatch
For instance, the Reserve Bank of New Zealand (RBNZ) recently implemented a significant 50bps cut and is expected to make further cuts as inflation in New Zealand has slowed faster than anticipated. Similarly, the Bank of Canada (BoC) is widely expected to follow with additional rate cuts, reflecting concerns about weakened economic growth. In contrast, resilient inflation and stronger-than-expected economic data in the U.S. have limited the Fed’s ability to continue aggressive rate cuts, which has further boosted the dollar. You can find out more about RBNZ on this blog I’ve posted: https://acy.com.au/en/market-news/market-analysis/analysis-of-the-new-zealand-dollars-after-a-50bp-from-rbnz-l-s-132614/
Should Trump win the election, market participants anticipate that the Fed might even pause its rate-cutting cycle altogether. Trump’s administration has consistently pressured the Fed for lower rates, but a Trump victory might strengthen the market’s belief in the U.S. economy's relative strength, supporting the dollar.
Global Inflation Dynamics and Impact on Central Banks
Inflation trends across major economies have also contributed to the divergence in monetary policy. In economies like New Zealand, the UK, and Canada, inflation has decelerated more rapidly than expected. This has given their respective central banks the flexibility to lower interest rates without stoking fears of overheating their economies. However, the U.S. has experienced more persistent inflation, which limits the Fed’s capacity for rate cuts. If inflation remains relatively strong, the Fed might hold off on further easing, providing additional support to the dollar.
As the November election approaches, the dollar’s trajectory will be closely tied to political developments and shifts in market sentiment regarding the election outcome. Traders and investors will be watching polling data, particularly in swing states, to assess the likelihood of a Trump victory. Additionally, any further signs of economic strength in the U.S. could reinforce the dollar’s upward momentum. However, should Trump’s opponent Kamala Harris regain her lead in the polls, the market may adjust its expectations, potentially reducing the Trump risk premium and dampening the dollar’s rally.
Central bank actions will also play a crucial role in the dollar’s future. Any unexpected rate cuts by the Fed or more aggressive easing from other central banks could alter the dollar’s current path. Inflation dynamics, trade tensions, and geopolitical risks will continue to be key drivers in the months ahead.
This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.
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