18/12/2020

What does a Joe Biden presidency mean for the USD and the global FX market?


To say the 2020 US presidential election was unique would be an understatement. Set against a backdrop of the coronavirus pandemic, violent protests, the rise of misinformation and a fractured electorate, the road to the White House was far from smooth – both for the candidates and the dollar, which has tumbled in value since March. So, what does the future hold for the world’s most traded currency – and the global FX market – after Joe Biden defeated Donald Trump to become the 46th president of the United States?

Short-term forecast

Let’s start by looking at the history books, which reveal the dollar typically rises once the result has been declared – regardless of who wins. Following nine of the ten elections since 1980, the dollar has strengthened in the first 100 days of the result – rising on average by 4% after Democrats have prevailed, and 2% when a Republican candidate has triumphed. However, 2020 is not a typical year. The dollar is already displaying signs of uncharacteristic post-election weakness – recording its worst month since July, in the wake of Mr Biden’s victory. Under Mr Trump’s administration, average dollar levels were 18% higher compared to Barack Obama’s eight-year tenure – according to the Federal Reserve’s trade-weighted US dollar index. And while Mr Trump repeatedly complained that this played into other countries hands – notably China and EU member states – to the detriment of US trade, many of his policies provided the foundation for the dollar’s strength. Under Mr Biden, however, it might be a vastly different story for the global reserve currency when he assumes office on 20 January. The new president is poised to undo many of the policies that put wind in the dollar’s sails, generating headwinds that could change its course in 2021. Likely causes of downward pressure on the dollar in the short-term include:

  • Trade policy: the Biden administration is likely to step away from President Trump’s “bombastic trade policy” by rolling back some of the tariffs imposed on imports from the nation’s trade rivals – particularly China and the EU – and rebuilding relationships with its allies. This could trigger a surge in American imports from oversea and boost emerging markets – devaluing the dollar.
  • Corporate tax: Mr Biden will plough ahead with his plans to reshape the American corporate tax landscape – having pledged to raise the rate to 28% during the election campaign – by pulling the plug on many of the business-friendly policies implemented by Mr Trump. However, this largely depends on him gaining control of the Senate – which remains on a knife-edge.

Long-term forecast

If we dust off our crystal ball and try to look further into the future, the dollar’s forecast remains overcast. But the reasons for this gloomy outlook are clear:

  • Government debt: like his predecessor, Mr Biden has committed to spending large amounts in fiscal stimulus to boost the economy – the Democrats could offer as much as $3 trillion (£2.3 trillion). Congress has already released an eye-watering $4 trillion in economic relief – the largest aid package in modern history. And while these federal funds – which are desperately required to prop up the economy – could give the dollar a short-term boost, the longer view is less promising, with US debt-to-GDP levels set to soar.
  • Inflation: money supply from the Federal Reserve will also increase, as it continues to engage in quantitative easing – the process of printing money and pumping it into the economy. This should trigger inflation, as the money reaches people and businesses who can spend it – causing prices to rise.
  • Interest rates: under normal circumstances, the Federal Reserve would combat inflation by raising interest rates. However, the central bank has already signalled that rates will remain at near-zero levels until at least 2023 – depriving itself of its main anti-inflationary weapon. This would prove a negative outcome for the dollar, as investors seek better returns elsewhere.

Currency markets are unpredictable

With President Biden at the steering wheel, all roads appear to lead to the doldrums for the dollar in the coming weeks and months. We must not forget, however, that the dynamic nature of currency markets means anything is possible, making them difficult to predict. For example, after forecasts of a “blue wave” election victory proved inaccurate, projections of a Democratic House and Senate have been reassessed; this could limit the amount of significant policy change Mr Biden can enact as president. It’s also worth remembering the dollar remains a safe-haven investment in times of turmoil – times such as these, as countries around the world attempt to recover from the pandemic.


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