Dollar hovers between hope and fear

The US dollar made a significant feint after polls closed in the United States. The exchange rate of the currency is strongly influenced by the presidential elections.

As the votes are counted, the dollar is swinging along with the odds of Joe Biden and Donald Trump. The currency shot up suddenly in the hours after the polls closed. At the time, it looked like Trump was going to win a surprise victory.

It also quickly became clear that the Democratic party was not going to get a convincing majority in the Senate and the House of Representatives. This will make it a lot more difficult for Biden – if he emerges as the winner – to carry out his plans. But what exactly are those plans and why is the currency world so afraid of them?

Boost for the economy
In the short term, Democrats want to give the economy an extra boost to boost the recovery after the corona virus. Instead of the more than $2.000 billion they have in mind, it will be difficult to release $500 billion without a majority in the Senate and House of Representatives. There is also expected to be less budget for other ambitious investment plans – for example for health care and climate measures.

If Biden has his way, the US government debt will rise by nearly $2030 billion by 6.000. That money has to come from somewhere. The Federal Reserve is already buying up massive amounts of US Treasury bonds. In addition, a large number of the new loans will end up with China and Japan.

Who will pay that?
But even for the United States, there is a limit somewhere to how much you can borrow. For the time being, it is far from in sight. Still, currency markets were clearly a little more comfortable with Trump's plans than Biden's. If only because the incumbent president has less ambitious plans than 4 years ago.

Then his election victory was largely due to all kinds of beautiful promises. Such as the construction of a wall at the border with Mexico, a huge tax cut, clear measures against unfair competition from China and to curb the government's greed for regulation.

Dollar under pressure
To be fair, Trump has fulfilled many of those promises in recent years. According to a large part of the American electorate, he has certainly not done badly. That explains why the race for the presidency is far more exciting than what the polls have prepared us for. Meanwhile, the standings at the polling stations point to a different result.

In the 24 hours that Biden now looks set to win the election, the US currency has fallen 1% against the euro. This still fulfills one of Trump's wishes: a fall in the dollar that strengthens the international competitive position of American business.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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