America chooses, the dollar loses?

The dollar is on the rise, as American interest rate cuts are still some time away. In a few months, the focus of the currency world will shift to the presidential elections. However, the question is whether it is wise to choose a position on that basis.

Last year, the financial world regularly held its breath during the run-up to a meeting of the Federal Reserve. However, this does not apply to the meeting scheduled for next Wednesday. It is a foregone conclusion that the reduction in the policy interest rate, which investors were hoping for, will not happen yet. In December, American inflation crept up slightly again to 3,4%. Moreover, economic figures indicate that the labor market is still quite tight. If Fed Chairman Jerome Powell chooses to cut interest rates, he will in one fell swoop jeopardize his carefully cultivated image as an inflation fighter.

Be careful with interest rates
It is therefore obvious that the financial world's focus will gradually shift to the rest of 2024. There are seven more Fed meetings scheduled for the end of the year. The expectation is that the US policy interest rate will fall in small steps this year to a level of approximately 4%. It will be an interesting challenge for the Federal Reserve to ensure that the interest rate cuts do not become politically charged. A too rapid decline in interest rates can be interpreted as an attempt to boost the economy, which could be positive for incumbent President Joe Biden. On the other hand, staying in place for too long can actually slow down growth.

Strong dollar with Trump?
The latter can in turn work to the advantage of a challenger. After Ron Desantis withdrew from the battle for leadership of the Republican Party, there is a good chance that Donald Trump will compete again with Biden. In the run-up to election day on November 5, currency markets will undoubtedly respond to the economic direction of the candidates. The idea is that the trade barriers that Trump is putting up will be beneficial for the dollar. Investment bank JPMorgan calculated that a 10% increase in import tariffs could increase the trade-weighted value of the US currency by 4% to 6%.

Important lesson
On the other hand, Biden's investment plans should actually lead to a weaker dollar. The high budget deficit and rising national debt may cause parties to lose confidence in the American system. However, practice showed a completely different picture during the respective presidential terms. Under Trump's administration, the dollar fell by 13%, while the currency has risen by 10% since Biden took office. There is an important lesson in this: it is wiser for a company to formulate a currency policy based on economic and interest rate developments than to try to look at politicians' cards.

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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