One needn’t look far to answer the question: Why do U.S. presidential elections affect the global currency market? There are two big picture reasons. The first is related to the reality that the United States has been the largest economy in the world since 1871. Though China has made recent noise about overtaking the west, so far they haven’t been able to do so. Secondly, the U.S. is the owner of the world’s reserve currency. This means that most international trade is conducted in American dollars. This gives the U.S. a position of economic importance enjoyed by no other country. But as to how a U.S. presidential election affects the currency market, let’s take a closer look.
If there’s one thing the dollar doesn’t like it’s uncertainty, and that’s something most modern presidential elections offer in heaping doses. With political polarization a driving force in today’s world, and no clear-cut winner based on weekly polling data, uncertainty will not have a chance to subside until after the election. The actual effect is that an election such as the one raging now between Hillary Clinton and Donald Trump will likely weaken confidence in the U.S. dollar in the short term, causing investors and traders to shuffle their money around to other “safe” currencies like the Japanese yen or the Swiss franc.
Election Cycle Theory
Research has been done into the idea that global financial markets fluctuate in predictable patterns based around the four-year U.S. presidential election cycle. The theory was developed by market historian, Yale Hirsch, and dates back to 2004 - not a huge sample size but worth mentioning.
Hirsch claims that the first year following an election sees weak market returns. They strengthen slightly in year two, then have much stronger showings in years’ three and four. While one shouldn’t build an investment strategy completely around this idea, as a broad way to look at currency markets and how much they might be driven by election cycles, it’s worth putting up on the shelf and taking it down to look at and polish now and then.
The prospect of a new president, or even the continuation of an old one who wins a second term, ushers in the prospect of new monetary policy. It’s a truism that American monetary policy changes trickle (or rush) downstream to have an effect on the rest of the world’s currencies. The differences between the two major parties in the U.S. are probably seen nowhere as starkly in contrast as in monetary issues. Here’s the short version.
Republican Party: This is the party of fiscal conservatism. The focus is normally on debt reduction, balanced budgets, and new jobs created through the private sector. Specific changes would involve business-friendly laws, lower taxes, and less government spending. Investors see these as bullish signals.
Democratic Party: This is the party that believes a stronger economy is created by increased government spending to create public jobs, universal healthcare, and increased entitlements. Investors sometimes turn bearish at the prospect of a Democratic Party administration, expecting socialist principles, larger government, and higher corporate taxes to follow shortly.
These are just a few of the ways a U.S. presidential election effects the American dollar and other currencies around the world. Ultimately, though important, an election is only one factor in the hundreds that contribute to long term currency trends. Eventually, the election will pass and the market returns to what passes for normal in the financial world, driven by fundamental economic forces that transcend the fallout from a single political competition. Alfatrade is a trusted Forex broker that helps you stay up-to-date on currency fluctuations and the reasons behind them.
Forex trading is speculative and may result in substantial or complete loss of funds, or even losses in excess of your initial margin deposit. It should therefore be undertaken only with "risk capital," defined as funds that are not necessary to your survival or well-being. It is your responsibility to consider whether foreign exchange trading is suitable for your financial position and investment objectives. If you do not thoroughly understand either the risks involved in Forex trading or AlfaTrade's various trading rules and policies, you are hereby instructed not to utilize AlfaTrade's services.