And the winner is: the US dollar

There has been much speculation in the financial markets in recent weeks about whether a Trump or Harris presidency would be beneficial for a strong dollar. The reality is that regardless of who wins this tight race, the dollar will remain strong. At the time of writing, Trump is surprisingly leading in the key states of Wisconsin, Michigan and Pennsylvania.

The dollar index is overbought - which is not unusual for presidential elections. What is more unusual, however, is the strength of the dollar against almost all currencies. For example, if we exclude Russian and Chinese currencies, which do not fluctuate freely on the market, the dollar is at an all-time high against emerging currencies. Even when the Fed raised rates in 2022, the dollar had not yet reached such a high level. This is explained by two important structural factors.

1. The outperformance of the US economy
We expect US growth to be 2,7% this year, while the eurozone growth could be 1,2% at best. Next year, US growth is likely to be close to potential, around 2%, while the eurozone growth will fall to 0,7%. The US growth story is unique in a low-growth world. The resilience of the US economy is based on high government spending – the deficit will remain at least around 5%-7% of GDP for the next three years. There has been much talk in the market about the high level of the US deficit. But since the dollar is the only global reserve currency, there will always be foreign investors willing to buy Treasury bonds. The surprisingly healthy US consumer is the other factor driving the economy higher. About 60%-70% of US households are rich, very rich. According to data from the University of Michigan, 37% of the population owns a home worth more than $500.000 and 30% of the population has a stock portfolio worth more than $500.000. This is a record.

2. The US stock market
The US stock market is the best performing developed stock market in the world, now accounting for 50% of the world’s stock market capitalization. This is also a record. High-tech stocks such as Meta, Google, Apple and Nvidia are dominating the digital and artificial intelligence revolutions. They are capturing the bulk of investment flows and are performing at an unprecedented pace. For example, Nvidia’s share price has risen by 182% since the beginning of the year. The AI ​​revolution will be driven primarily by US companies. They have a technological advantage in this area. They can also count on low energy prices to power this revolution. Let’s not forget that AI is very energy-intensive. Average energy costs in the United States are four times lower than in Europe. This partly explains why Europe is unable to develop an AI industry worthy of the name. Europe is clearly not competing in the same league as the US.

In this context, it is not surprising that the surpluses of global corporations, financial institutions, governments and household savings are being transferred to the United States in search of high investment returns. Historically, the surpluses of emerging countries have always gone to the United States. What is even more surprising is that this phenomenon is now also affecting Europe. European surpluses are going directly to the US economy, whereas previously they stayed on the European continent and helped small and medium-sized domestic companies grow. Ultimately, massive capital is constantly flowing into the US market, which structurally supports the US dollar exchange rate. This is the main driver of the recent strength of the US dollar. It has a greater impact than exchange rate differences or politics.

It will certainly be hours, perhaps even days if the race remains tight and lawsuits are filed, before we know the name of the winner of the election. A Trump presidency will most likely be synonymous with inflationary policies, while a Harris presidency will exacerbate the deindustrialization of Europe by encouraging European companies to locate in the United States to benefit from generous government subsidies. But one thing will not change: the dollar will remain strong because the American economy is incredibly strong.

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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