Many economists are perplexed by the sudden drop in value of the US dollar in August, especially since recent data indicates a strengthening economy. Retail sales growth, reduced jobless claims and strong performance by the service sector are among positive indicators that have been reported following earlier concerns about economic slowdown in July and early August. But perhaps this puzzle can be solved with some hints from politics.
It appears that the dollar’s recent behaviour may be affected by expectations surrounding next month’s presidential election. The US Dollar Index (DXY) took a sharp knock at the start of August, which coincided with polls showing Democrat Kamala Harris doing better than Joe Biden against Republican President Donald Trump.
The switch started on July 21 when Joe Biden announced he would not stand for re-election and endorsed Vice President Kamala Harris as Democratic candidate. Within one week, surveys reflected Harris’ improved position in the race against Trump.
Market watchers suggest this has prompted an unwinding of “Trump trades” such as bets on a stronger greenback. A higher US currency is often linked to Trump due to his tax cuts, tariffs and immigration controls, which are viewed as inflationary because they keep interest rates up.
Harris’ Campaign Strategy
Since becoming the Democratic nominee, several factors have worked in favour of Harris:
Shifting the Narrative: Harris’ campaign has moved away from Biden’s “autocracy vs democracy” story and instead focused on Trump being “weird” rather than authoritarian – an approach that seems to resonate with undecideds.
Economic Focus: With her emphasis on economic populism, addressing middle-class worries over things like child tax credits, price gouging and housing subsidies etc., these areas gained more attention among voters.
Strategic Ambiguity: By distancing herself from less popular parts of Biden’s record while avoiding firm positions on controversial topics where she can still be attacked effectively by President Donald Trump, this has made it difficult for him to go after her.
Potential Convention Bounce
During the Democratic National Convention Harris could get a “convention bounce” in the polls, and if so more “Trump trades” would be unwound potentially leading to further weakness for the dollar.
However, it should be noted that convention bounces are not guaranteed and often fade away quickly. But a post-convention surge in favour of Harris could put more downward pressure on the greenback.
Long-term Implications For The Dollar
The outcome of November’s election will likely have significant implications for the future direction of the US currency. Market perception is that Trump policies may lead to higher interest rates while Harris policies might allow for a more accommodative monetary stance.
Meanwhile, Asia-Pacific stock markets have responded with caution to this US rally given concerns about China’s recovery. Geopolitical tensions such as ongoing Gaza conflict continue impacting global risk sentiment which adds another layer of uncertainty around currency markets.
Against a backdrop of complex global economic dynamics, both domestic politics and international events will shape what lies ahead for the US dollar.
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