Marshall Gittler, Head of Investment research, FXPRIMUS.com
Now that the US Presidential primaries are pretty well sewn up, we can start thinking about what impact the presidential election in November is likely to have on the dollar.
The first thing we should remember is that markets, in general, dislike uncertainty. Uncertainty means risk and people need to be incentivized to take a risk, usually by selling an asset at a discount. It’s clear that from an investor’s point of view, Donald Trump represents a greater unknown than Hillary Clinton.
Trump is running as an agent of radical change not beholden at all to the party under whose banner he is running. The details of his policies are still largely unformulated and even his advisors are largely unknown, so it’s hard to determine just what he might want to do. That suggests the dollar would probably suffer if it looks like Trump is likely to win the election.
Clinton on the other hand is running not only on her extensive record as a senator and Secretary of State, but also as the standard bearer of the Democratic Party and to a large degree, as the continuation of the Obama years. That’s reassuring to the markets. Even if they don’t agree with the policies, investors at least know what they are.
President Trump, with his business background, his lack of political experience, and his media prominence (not to mention his active love life), might be considered as a US version of former Italian PM Silvio Berlusconi. How did the Italian lira (ITL) fare during Berlusconi's tenure? As the graph shows, ITL fell some 5% against the Deutsche Mark (DEM) during Berlusconi’s first administration in 1994. It’s not clear whether this was good or bad however as the lira was chronically weak and fell even more after Berlusconi left office.
During Berlusconi’s two later terms in office, Italy used the euro and so we can’t isolate the impact of his policies on the currency. But looking at how Italian bonds performed compared to Spanish bonds, it’s clear that the economic performance was worse. The Italian bond market’s performance is particularly egregious given that Spanish inflation was almost always higher than Italian inflation during this period. A similar performance in the US would probably mean a weaker dollar.
Furthermore, what we do know of Trump’s policies suggests that he is adamantly opposed to many of the trade agreements that the US has entered into and might try to renegotiate some of them.
How might that play out in the FX market? For guidance, we can look at how the dollar performed from 5 March 2002 until 4 Dec 2003, the period when US President Bush imposed Section 201 tariffs on imported steel. The tariffs ignited a small international trade war, with the EU threatening retaliatory tariffs on US products and many major countries, including Japan, China, Korea and Brazil filing suits with the World Trade Organization.
As you can see, the dollar fell against its major counterparts by around 22% during this period.
The impact on EM currencies though might be different. In fact the Mexican peso (MXN) fell on Wednesday after Trump’s remaining opponents pulled out of the race, clearing the way for him to become the Republican candidate and, if successful, build a big wall between the US and Mexico.
In the case of a President Hillary Clinton, the FX market would probably turn to her husband’ tenure for guidance on how things might turn out. That experience would definitely work to the dollar’s advantage. The dollar’s value against the major trading partners of the US rose 19% during President Bill Clinton’s eight years in office. Of course past performance is no guarantee of future performance, but at least the market would have a rough idea of what to expect.
Clinton could also be expected to support Fed Chair Janet Yellen, and Yellen – more than Clinton, probably – holds the key to the dollar’s future. Trump, on the other hand, said Thursday that he would probably replace Yellen with a Republican when her term of office expires in February 2018. Furthermore, Trump was quoted on CNBC saying as saying, “I’m a low interest rate person. If we raise interest rates, and the dollar starts getting too strong, we’re going to have some very major problems.” That’s a worrisome statement in itself for the FX market.
In short, I recommend watching the national polls to gauge the two candidates’ popularity. If it looks like Trump might win, I would expect to see the dollar weaken.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.