Presidential elections in the USA and consequences over change of value of the US Dollar- magazine Economy and Business

 

author: Jovan Kiprijanov

At the beginning of November 2020, presidential elections should take place in the United States of America, where Donald Tramp, as representative of the Republican Party and Joe Biden, as representative of the Democratic Party would confront as presidential candidates. Uncertain is the victory of any of these candidates at the elections and the outcome of it would have mayor impact over the financial markets in the world.

Usually the elections have positive impact over the USA economy, but this time the circumstances are different due to the newly occurred situation with the Corona virus pandemic. Therefore, the US Dollar may be noted as the most affected from all the other currencies, which largely depends on the developments in the USA economy.

At the beginning of Corona virus pandemic, the US dollar became safe haven currency for investing in the world (together with the Japanese Yen), so the currency pair EUR/USD at mid-March 2020 reached the highest level relative to the EUR (1, 0658), i.e. the April level of 2017, as a consequence of increased demand for US dollars and need for liquidity in this currency. Unlike this period, for the past three months the pair registered the lowest level in the past two years (1.1941), which is an indication of high currency volatility in period of mayor changes and movements at the world markets. An index of US Dollar was reduced by almost 7% for the last quarter, although for the first three months of the year it grew continuously. Having in mind the economic recovery of Europe from the Corona virus pandemic, as well as the manner of dealing with, the introduction of restrictions and relaxation of measures compared to the one of USA, it is concluded that it has contributed to a weaker USD relative to the EUR.

The very emergence of COVID -19 created liquidity crisis, followed up by appropriate reaction by the Federal Reserves of the USA (FED), which introduced a program for Quantitative Easing, by which the referential interest rate was reduced to 0,00 – 0,25% for unlimited period of time. FED promised that they will purchase unlimited amount of US Treasury Bills, as well as securities aimed at injecting more assets for assistance to the institutions.

Several scenario are possible on how would the level of the US Dollar be like following the presidential elections depending on the outcome. Still, given the presence of increased elective, social and uncertainty of COVID-19, the outcome is still highly uncertain and it is hard to come out with exact prediction on how would the level of the USD look like after the elections. While the Republicans are more in favor of interventions at the free market, the Democrats are directed toward stock markets and Wall Street, where they sell shares and stocks denominated in USD, or simply said the Republicans are more supportive to the strong USD, while the victory of Biden would mean depreciated USD in the coming period.

Both candidates have different visions and strategies on the USA future. If Donald Trump is re-elected for a President, it is more probable that in his second term of office he would stand for lower taxes, thereby reducing the financial burden over the corporations and would stimulate the economic growth. Donald Trump administration would do everything that is needed to speed up the economy recovery. In February 2020, the Federal Reserves received assistance of 3 trillion USD, which increased their Balance of Payments, changing from 4, 4 trillion to 7 trillion USD, assets intended for support to the most affected segments. When Donald Trump started its first term of office in 2016, the economy was in relatively stable condition. But his second term of office would begun in quite different circumstances having in mind that during 2020 the USA faced severe trade war with China, high economic decline due to COVID-19 and widely spread social riots. All these events contributed to historically high levels of uncertainty at the capital market, and the President Trump promoted himself as King of Debt, which assumes that what the USA expected from its currency in the pre-virus economy is not same with the events thereafter.

On the other hand, Joe Biden is more inclined to increasing the corporate tax from 21% to 28% and giving priority to higher investments in the health system, increasing the minimum welfare and providing higher support for housing and education at federal level. This change could disturb the confidence at the market on global level, especially if there is a pressure over the USA Federal Reserves for monetary financing of the state expenditures. All this indicates that implementation of the Joe Biden’s policies would result in lower USD level.

European political leaders prefer the stability of the regime of Joe Biden opposite the diplomatic instability of Trump regardless of the exchange rate level. Even if the USD remains at the low level, the chances for currency war with the Eurozone would be far less small with Joe Biden as the USA President.

According to the results of the recent poll, Joe Biden is in two figure leadership before Donald Trump. But taking into consideration the COVID-19 pandemic, widely spread social riots and the unpredictable nature of Donald Trump, a lot of changes could take place from now till the day of the elections.

 

 

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