Understanding Dollar Volatility amid the US Election Season
Historically, the U.S. dollar has faced considerable fluctuations during election seasons, often impacting businesses and individuals involved in international transactions.
Factors influencing the dollar’s value are numerous, including the policies of competing candidates, the evolution of economic data, and the varied responses to the U.S. political climate across other parts of the world.
How Elections Influence the Dollar
Currency markets are sensitive to any kind of uncertainty that could impact economic or political stability, and a major election certainly qualifies. As political parties present contrasting fiscal and foreign policy stances, currency traders attempt to predict how these changes may shape economic conditions.
For example, a candidate proposing increased government spending or lower interest rates could be perceived as a factor that could weaken the dollar, while more conservative economic policies might have the opposite effect.
In addition to candidate policies, foreign investors and businesses often closely monitor potential shifts in U.S. policy, adjusting their own currency reserves, hedges, and investments accordingly. These pre-emptive moves in anticipation of policy outcomes drive daily fluctuations as new polls, data and/or debates sway public and investor sentiment.
Democrats vs Republicans
Democrats
Republicans
1. Income Growth and Consumption: Policies that put more money into the hands of low- and middle-income earners—such as tax credits and wage increases—could boost domestic demand, potentially increasing imports, which could put slight downward pressure on the dollar. However, if these policies stimulate overall economic growth and job creation, they could attract foreign investment, strengthening the dollar in the long term.
2. Tax Reforms and Business Investment: Higher taxes on wealthier individuals and corporations could lead to some short-term capital outflow, as some investors might look for lower-tax environments. Moreover, if the additional tax revenue is channelled into infrastructure, education, and workforce training, these investments could attract foreign interest by strengthening the U.S. economy, potentially supporting the dollar.
3. Equity Initiatives and Social Programs: Harris’ focus on equity and economic fairness could increase U.S. consumer spending and labour market participation, which would be positive for growth. If these programs are funded through borrowing rather than tax revenues, they might increase national debt, putting downward pressure on the dollar. But sustainable investment in human capital often creates longer-term growth, which can benefit the dollar by attracting foreign direct investment.
1. Fiscal Restraint and Debt Reduction: Republicans are often emphatic about reducing government spending and national debt, which can lower inflation expectations and strengthen investor confidence in the U.S. economy. This focus on fiscal discipline generally supports a stronger dollar by keeping inflation in check, making the dollar more attractive to foreign investors across the world. Despite this fact, the previous Trump administration added some $3tn to US debt, making predictions more difficult than simply looking at a tax manifesto.
2. Tax Cuts and Business-Friendly Policies: Republicans tend to favour tax cuts for businesses and high-income earners, aiming to stimulate investment, economic growth, and job creation. These policies can encourage capital inflows and boost business investment, which could support the dollar by making the U.S. a more attractive place for both domestic and foreign investment. As noted before though, these can considerably add to the US debt pile, which investors will always monitor.
3. Deregulation: Republican policies often seek to reduce regulations on industries such as energy, finance, and manufacturing. Lower regulatory burdens can reduce costs for businesses, boosting profits and potentially leading to higher levels of investment. If this approach accelerates economic growth, it could positively impact the dollar, especially if it attracts foreign investment and increases demand for U.S. goods and services.
4. Trade Policy and Global Stance: Republicans may prioritise trade policies that reduce the U.S. trade deficit, supporting domestic production. While more protectionist policies could reduce imports and slightly lower foreign demand for the dollar, encouraging domestic production could strengthen the dollar if it bolsters economic growth and global demand for U.S. assets. Despite this, Trump’s insistence on slapping huge tariffs onto foreign imports will likely shake global markets, in turn, damaging US markets credibility and reputation globally as a free trade hub.
The Ripple Effects on International Business
For international businesses, even slight dollar fluctuations can significantly impact profit margins, pricing strategies, and financial planning. Companies relying on U.S or Chinese USD priced components, for example, may face unpredictable costs if the dollar swings abruptly. Conversely, businesses exporting to the U.S. may find their goods more or less competitive in the American market as the dollar rises or falls.
Such volatility also affects international payments, a challenge compounded by the time-sensitive nature of exchange rates. When receiving or sending payments across borders, an unexpected dip or spike in the dollar’s value can alter the final sum that a company or individual receives or must pay. For businesses with narrow profit margins, this can erode profitability.
Locking In Exchange Rates
For those managing multi-currency accounts or making frequent international payments, the ability to lock in exchange rates offers a powerful tool for avoiding the potential downsides of currency volatility. Exchange rate locks, known as forward contracts, allow businesses and individuals to secure a set rate for future transactions, shielding them from adverse shifts in the financial market. Shifts that, at this time, will likely be politically driven.
Given the unpredictable nature of election-induced currency fluctuations, a locked-in rate feature can offer peace of mind and greater financial predictability. Such solutions not only reduce currency risk but also allow for more accurate forecasting and budgeting—critical for companies operating in multiple markets or handling high-value transactions.
Preparing for the Uncertain Road Ahead
For those seeking financial stability, utilising the locked exchange rate feature available with all Finseta accounts can help ensure that the complexities of election-driven market changes do not interfere with their financial goals.
Speak to your dedicated account manager with us to find out more.
