The U.S. election is considered “U.S. dollar positive” by Citi strategists, with trade and tariff policies expected to be the primary drivers of a bullish USD outlook. The potential for increased tariffs, particularly those targeting China, is seen as a key factor that could strengthen the dollar. Currencies such as the Chinese yuan, euro, Mexican peso, Taiwanese dollar, and Thai baht are identified as particularly vulnerable to these risks.
Citi outlines various election scenarios, with different implications for the dollar. A “red wave” scenario, where Trump wins and Republicans gain control of both chambers of Congress, is seen as the most USD positive. This scenario is expected to focus on improving the trade deficit through tariffs and potentially some fiscal expansion through further tax cuts and deregulation. However, Citi notes that there is a ceiling for how much the USD could rally on election risk alone, given other factors currently impacting the greenback.
Market participants typically begin to trade election themes two to three months ahead of the event, with the U.S. presidential debates in September marking a key point for markets to start pricing in election outcomes more seriously. Citi strategists expect that any USD strength related to the election will likely be priced in well before November, with the dollar possibly reaching its peak around that time. This suggests that the election will be a “sell the news” event for the USD and for volatility.
Other factors influencing the dollar
In addition to election risks, other factors will remain important for the greenback in the coming months. Federal Reserve policy, particularly the path of interest rates, and broader macroeconomic conditions, including the probability of a U.S. recession, will influence the dollar alongside election risks. Furthermore, global economic developments, such as the slowdown in manufacturing and economic challenges in Europe and China, could also have an impact on the dollar.
Overall, while the U.S. election is expected to have a significant impact on the dollar, it is important to consider other factors that could influence the currency as well. Market participants should remain vigilant and closely monitor developments not only related to the election but also in terms of Federal Reserve policy, recession risks, and global economic conditions.