Election Countdown: Dollar at Crossroads as Trump or Harris Presidency Approaches

The upcoming U.S. election could represent a pivotal moment for the dollar. A victory for Trump might provide an initial boost for the currency, while a win for Harris could lead to short-term weakness. However, experts caution against assuming that any immediate market reaction will persist into 2025.

Analysts at HSBC emphasized that assuming the post-election reactions will set the tone for future currency movements could be misguided. Various factors, including whether actual policy outcomes align with expectations, could suspend or reverse the initial currency fluctuations, potentially allowing other elements to take precedence in the foreign exchange market.

HSBC examined different scenarios and their potential effects on the dollar. A Republican clean sweep, which would pave the way for increased fiscal stimulus, is expected to be the most favorable outcome for the dollar in the short term.

The bank anticipates a sharp appreciation of the dollar if indications of future fiscal stimulus emerge, as this would diminish expectations for Federal Reserve easing in 2025. Additionally, increased trade tariffs could bolster the dollar, particularly if they contribute to inflation expectations.

In a scenario where the government is divided with Trump in the presidency, analysts believe the dollar would initially rally. However, this situation would lack the fiscal support that a Republican clean sweep would provide.

Conversely, a Democratic clean sweep could create a potential “sling-shot path” for the dollar. While initial weakness might occur, the currency could rebound in 2025 as markets begin to account for various forms of fiscal stimulus.

If Harris becomes president but faces a divided government, HSBC views this as a “status-quo outcome.” It may result in some short-term dollar weakness, but any effects would likely not last.

Historically, the dollar tends to strengthen leading up to U.S. elections, driven by increased demand for safe-haven assets amid uncertainty about the outcome—an occurrence that may be repeated in the coming weeks.

However, betting on the continuity of any immediate post-election dollar movements into 2025 could be ill-advised. HSBC highlighted the importance of evaluating subsequent policy developments and their effects on fiscal, trade, and monetary policies to gauge the dollar’s trajectory effectively.