With the US presidential election drawing closer, the question of which outcome would be better for the global economy is gaining urgency. Both sides have their sound strategies, but let's focus on the impact on the dollar by taking a closer look at the dollar index chart.
Analysts suggest that a Trump victory would be a more bullish scenario for the dollar, while a Biden re-election is seen as more neutral. Overall, the dollar is expected to continue strengthening against major currencies ahead of the US presidential election and depreciate afterward.
Why is the former president beneficial to the dollar?
Donald Trump reportedly considers imposing new trade restrictions with the EU if he returns to the White House, essentially reigniting the trade wars.
This includes the introduction of a minimum 10% tariff and countermeasures against European taxes on digital services. In addition, he promises substantial tariffs that could significantly affect trade with China.
Biden, for his part, has already prepared new restrictions against China, which the administration is ready to implement before the elections. Overall, the trend towards protectionism has only just begun.
But what about the Federal Reserve's possible interest rate cut?
Amid continuing tensions in the Middle East and the reluctance of the parties to agree on a peace plan, businesses face rising logistics costs.
This increase in transport costs is likely to be reflected in the prices of consumer goods in the future. In this context, the regulator seems hesitant to address the issue with an early rate cut.
For instance, Atlanta Fed President Raphael Bostic, who is voting on the Federal Open Market Committee’s policy decisions this year, suggests that the first move might come sometime in the summertime.
However, two factors could force the regulator to reconsider its stance. First, as has been repeatedly pointed out, keeping rates at a high level affects not only the population but also the commercial real estate market and regional banks.
As a result, the latter's paper losses have soared again to record levels. If investors start withdrawing money, as they did last year, a banking crisis could resume.
To avoid this scenario, the regulator is likely to initially resort to printing more money and may have to consider a sudden rate cut if that is not enough.
The second potential pressure factor is the labor market. Officially, January's monthly employment report surprised economists with creating 353,000 new jobs, well above expectations.
However, every month, there are reports of massive layoffs in various companies. Perhaps some of the newly unemployed are not being considered, and not everything is as rosy as it seems.
What should traders do?
Frankly speaking, it is impossible to be ready for every scenario, so it is more reasonable to act depending on the developments, keeping an eye on macroeconomic indicators and pre-election polls.
