With the 2024 U.S. election just around the corner, currency markets are bracing for volatility.
With Vice President Kamala Harris representing the Democrats and former President Donald Trump running for the Republicans, their contrasting policies promise to create different impacts on global forex pairs.
Here’s a breakdown of key areas to watch and examples of how specific assets might react depending on the election’s outcome.
1. U.S. Dollar (USD) as a Safe-Haven Currency
Historically, elections bring volatility to the U.S. dollar as investors react to the potential policy changes. During times of heightened uncertainty, the dollar often strengthens as investors seek safe-haven assets, especially if geopolitical risks or trade tensions are anticipated.
Conversely, if global relations stabilize, investors may feel less of a need to hold onto dollars, weakening the currency slightly.
Example:
If Trump wins, we might see increased tariffs or protectionist trade policies, especially with China. This could strengthen the dollar as investors seek safety amid possible trade conflicts.
If Harris wins, a focus on multilateral trade and cooperation could reduce the dollar’s safe-haven demand, leading to a modest weakening against currencies like the euro (EUR) or Japanese yen (JPY)
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2. Trade Policy and Currency Impact
Trade policy is a critical area where the candidates differ. Trump’s past administration saw tariffs on imports, especially from China, aiming to boost U.S. industries but also leading to market jitters.
Harris is expected to continue current policies focused on smoother international trade.
Example:
USD/CNY (Chinese Yuan): If Trump is elected, traders might anticipate a stronger dollar against the yuan due to potential trade restrictions.
This could lead to USD/CNY rises as U.S.-China tensions push investors toward the dollar.
USD/MXN (Mexican Peso): Harris’s emphasis on regional cooperation could stabilize the dollar against the peso, particularly benefiting Mexico’s economy if trade relations improve.
We might see USD/MXN remain steady or even drop as confidence in cross-border trade increases
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3. Interest Rates and Monetary Policy
The Federal Reserve operates independently of the White House, but market expectations for future monetary policy can shift based on election outcomes.
A Harris victory could align with the Fed’s current approach, whereas Trump may advocate for lower rates, potentially weakening the dollar over time.
Example:
USD/JPY (Japanese Yen): The yen typically strengthens in times of uncertainty. If Trump wins and advocates lower rates, the dollar could weaken against the yen, pushing USD/JPY lower.
Alternatively, Harris’s support for the Fed’s independence may lead to more consistent monetary policy, stabilizing USD/JPY
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4. Fiscal Policy and Government Spending
Government spending is another major factor impacting the U.S. dollar.
Both candidates propose stimulus, though their focuses differ—Trump on tax cuts and defense spending,
Harris on infrastructure, healthcare, and climate. Increased government spending generally fuels short-term growth, but large deficits can weigh on the dollar in the long term.
Example:
EUR/USD (Euro vs. U.S. Dollar): Under Trump’s tax cuts and defense focus, the dollar may strengthen short-term but face pressure long-term as deficits rise. This could mean a volatile but potentially higher EUR/USD over time.
A Harris win might support the dollar with fiscal responsibility but add initial pressure due to substantial spending on social programs, possibly keeping EUR/USD balanced or leaning higher if inflation concerns rise
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5. Geopolitical Strategy and Global Relations
Geopolitical tensions, particularly regarding U.S.-China relations and alliances, are central to forex markets. Trump’s previous administration emphasized a more aggressive stance, while Harris is expected to prioritize diplomacy and international cooperation.
Example:
USD/CAD (Canadian Dollar): As Canada is the U.S.'s top trading partner, a Trump win could create uncertainty, pushing USD/CAD higher if tensions rise. Conversely, a Harris presidency may support the Canadian dollar through improved relations, keeping USD/CAD stable or pushing it lower
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Strategies for Forex Traders During the 2024 Election
With such high potential for market swings, here are strategies traders may consider:
Diversification: Spreading risk across multiple currency pairs or even other asset classes can mitigate risks from any single currency’s volatility.
Hedging Positions: Instruments like options and forward contracts can help traders lock in prices or protect against losses, particularly useful during election volatility.
Using Stop-Loss Orders: Ensuring positions are protected against extreme market moves is essential, as high volatility can lead to rapid swings.
Conclusion
The 2024 U.S. election presents numerous trading opportunities and risks, from safe-haven flows to changes in trade policy.
Monitoring the evolving political landscape, particularly as polling data and candidate policies become clearer, will be key to successfully navigating this high-stakes event. As always, traders should approach with caution and use risk management strategies to make the most of potential market movements.
Stay tuned to forex368.com for real-time insights and analysis as election night approaches.