Republicans and Democrats: What trajectory for the dollar with the presidential election?

Dollar movements during the campaign

The US election is approaching, and the preceding electoral campaign is already slightly influencing the dollar's trajectory. Looking back a few months, we witnessed a strengthening of the Dollar Index before the debate between Joe Biden and Donald Trump. This occurred in a context where signs of fatigue and communication errors from the Democratic president were multiplying, casting serious doubts on his chances of victory against Donald Trump. The televised debate confirmed these fears, putting pressure on the Democratic camp. Less than a month later, Joe Biden announced he would not seek re-election. Consequently, the dollar declined against major currencies throughout August.

Why is Trump associated with a strong dollar?

Primarily because Trump is perceived as the candidate for tax cuts for US businesses and households, particularly the wealthiest. This was one of his campaign themes in 2016 and remains so in 2024. Tax cuts tend to favour consumption and economic activity, but also potentially inflation. Campaign announcements on this theme tend to drive up US interest rates and the dollar, as the Federal Reserve (Fed) may be compelled to maintain rates at a certain level to prevent economic and price overheating.

Donald Trump is also associated with a strong dollar because the promotion of protectionist measures, particularly on goods from China via increased trade tariffs, is also perceived as inflationary by increasing the price of imported goods. This increase could potentially be passed on to the end consumer of these goods.

Finally, the adoption of strong protectionist measures can also weaken countries or economic zones against which these measures apply, potentially weighing on these countries' currencies and leading to a 'default' strengthening of the dollar.

But did the dollar actually strengthen during Trump's term?

The answer is... no! Between November 2016 and November 2020, the Dollar Index fell by about 5%. And if we go back further to the last term of a Republican president before Donald Trump, that is, George W. Bush's term (two consecutive terms), the Dollar Index weakened by... 25% over the period!

Dollar Index performance during Trump's and George W. Bush's terms

Why is Kamala Harris perceived as a 'bearish' candidate for the dollar?

During the pandemic and afterwards, President Biden implemented an expansionary fiscal policy aimed first at supporting the American economy in the face of the health crisis, but also at strengthening certain strategic sectors against Chinese competition while promoting the development of new energies and strengthening infrastructure. This policy led to a massive increase in deficits, and it is evident that this pace cannot be maintained for several more years. If Kamala Harris wins the presidential election, she should therefore apply a more moderate fiscal policy, probably with an increase in taxation on businesses, the wealthiest households, and possibly on capital gains taxation.

This less expansionary policy would be compatible with the 'soft landing' of the US economy desired by the Fed, allowing the central bank to continue its rate-cutting cycle without risking a rapid rebound in the economy and inflation. This environment could be bearish for the dollar initially due to a slightly weaker US economic growth rate, but also due to a generally less 'rough' foreign trade policy than under a Trump mandate. This could favour a continued rebound of the euro against the dollar for some time.

But should we conclude that Democrats are 'bearish for the dollar'?

And the answer is, again, no! A study by Imperial College Business School analysing data over a 40-year period shows that the US dollar appreciated by an average of 4.15% per year during Democratic presidential cycles and depreciated by 1.25% per year on average during Republican cycles.

In conclusion, it is still unwise to base investment strategies solely on the colour of the political candidate that wins the election. The emergence of certain economic crises or geopolitical events shapes the dollar's trajectory, as well as the Federal Reserve's behaviour in response to these events. It is clearly more judicious to rely on the observation and analysis of these events to make investment decisions.

Is Donald Trump more favourable to Bitcoin than Kamala Harris?

If it's a question of media noise, then yes, Donald Trump is significantly more audible about cryptos than Kamala Harris. Beyond the announcement of the launch of his decentralised cryptocurrency platform 'World Liberty Financial' (whose actual launch date is still unknown) and his regular staging on social networks, it's difficult to know if the former US president would apply a genuinely pro-crypto policy if elected for a second term.

A few years ago, he described Bitcoin as a 'looming disaster' and a 'scam'... to become today one of its most fervent supporters... there is therefore necessarily a lot of political opportunism and posturing in these statements of recent months.

The US Securities and Exchange Commission (SEC) very tough stance for several years, under Joe Biden's mandate, does not make it easy for Kamala Harris to appear as a pro-crypto candidate, even if some of her recent statements were in that direction. At a fundraising event for her campaign in September, she stated: "We are going to invest in America's future. We will encourage innovative technologies like artificial intelligence and digital assets, while protecting our consumers and investors".

Before the election, this perceived difference between the two candidates slightly influences Bitcoin's trajectory. For example, after the Harris-Trump debate, which turned to the current vice president's advantage, Bitcoin fell slightly before recovering. Conversely, before Joe Biden withdrew from the nomination race, Bitcoin experienced some upward phases when Trump came out ahead in the polls.

But the movements we describe are only short-term movements. It seems unlikely to us that Bitcoin's trajectory will be strongly or durably influenced by the election of one or the other candidate.

No matter what is happening this month, Bitcoin keeps its upward trend

United states will not block a promising technology as the bitcoin

The United States has a strong culture of innovation, technology, and efficiency. If a technology or innovation allows for improving certain processes and gaining competitiveness, it is well received and can develop with the blessing of political and regulatory authorities. And even if this journey is not always linear, it is rare for the United States to block a promising technology. And blockchain and certain crypto assets are part of this.

Bitcoin's trajectory will also depend a lot on the trajectory of US monetary policy and the pace of Federal Reserve (Fed) rate cuts, a pace that itself depends on the performance of the economy... and inflation, which should not be definitively buried.