Despite the importance of the November 3rd US Presidential Election, the US dollar had been under pressure since the end of September, mainly influenced by the prospects of the new stimulus bill. Although key differences still remain, the market had remained complacent since negotiations are continuing.
The DXY or the US dollar index had been range-bound since mid-August, which is why our assumption that US dollar bears could take a hit during Q4 was not been 100% accurate. The currency did not continue to weaken at an impulsive pace, but could it show some recovery signs at least until the election outcome will be certain?
# Stocks selling would favor the dollar
Risk assets and currencies continued to fare well during the summer and autumn, despite major downside risks. The combination of monetary and fiscal stimulus influenced market psychology more than even central bankers and governments expected, which is why a topping formation takes so much time to form.
However, as we get close to the election, stocks could be under pressure, favoring flows into the US dollar. It is not excluded to see a pick up in value during the next week, especially since a shift of power could have major implications.
# Narrowing democratic lead to favor rising uncertainty
Based on the current projections, a “Blue Wave” is coming. That means a Democratic nominee in the White House, as well as the winning of a Senate majority. How a Republican-led administration handled the COVID-19 pandemic is not getting good feedback from the American public, which is why Joe Biden is leading in the polls.
Financial markets are expected to monitor new figures in the days ahead and in case the lead will start to narrow, we should expect to see a flight to safety and thus a tailwind for the US dollar.
# Limited dollar upside, regardless of the outcome?
Regardless of who wins the election, big fiscal spending looks to be a done deal for the US in the years ahead. As a result, there will be new incentives to get rid of the US dollar. Mounting public debt and unfunded liabilities will be the issues that will have to be solved, and the only way out is debt monetization and fiscal spending.
It is possible to see the dollar rising ahead of the event, but in the long run, there are reasons on both sides of the aisle on what could be the next trajectory of the current global reserve currency.