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How U.S. Politics Influence the Dollar: Analyzing the Impact of Elections and Policy

A Report by CYS Global Remit Counterparty Sales & Alliance Unit


Political Influence on Currency Markets 

Political events such as elections, leadership changes, and policy shifts can significantly impact the currencies of emerging economies due to their less stable financial flows. These shifts easily influence trade and investment sentiment, causing frequent currency fluctuations. Even with major global currencies like the U.S. dollar, politics can play a slightly smaller role, yet recent events indicate that the dollar is not entirely unaffected by political changes. 


The Dollar's Reaction to U.S. Elections 

Following the latest election, the dollar surged nearly 2% against several major global currencies after Republican Donald Trump defeated Democrat Kamala Harris. This marked the dollar's largest single-day gain in over eight years, a rise reminiscent of the Brexit vote in 2016. Steven Englander, head of G10 FX strategy at Standard Chartered, highlighted that factors like a decisive win and today's polarized political climate enhance market reactions. 


Understanding Dollar Movements 

A 2% increase in the dollar in a single day is unusual. Given its involvement in almost 90% of all global foreign exchange trades, such a sharp move requires significant trading activity. Large daily gains, usually around 1.5%, occur during high-volatility periods, such as the onset of the pandemic in March 2020 or in September 2022 when U.S. interest rates approached a 40-year high. 


Long-term Effects of Political Shocks 

The British pound exemplifies the lasting impact of political events, as it hasn't fully recovered from the Brexit vote, remaining approximately 10% weaker against the dollar. For the dollar, Mizuho analysts anticipate another potential 4% increase, comparable to levels seen post-Trump's 2016 victory. Barclays predicts that a Republican-controlled Congress could bring the euro down to $1.03 in the short term. 


Political Impact on Markets 

The recent election-induced dollar movement demonstrates how political surprises can cause significant financial shifts, even in stable markets. While deep markets like the dollar's generally mitigate political volatility, they still react to changes in leadership or policy that signal substantial shifts. In today's interconnected world, politics and currency values are intricately linked. 

 

 

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