A Bumpy Ride for the U.S. Dollar

With the U.S. general election on the horizon, investors are trying to understand a range of potential impacts based on who might move into the White House in 2025. The strength of the dollar relative to other global currencies is a key consideration in light of some of the candidates’ policy proposals.

“Investors have a heightened interest in how election results could move the U.S. dollar, given its status as the world’s reserve currency—the favored choice for central bank allocations, global trade financing, cross-border lending and global debt issuances,” says Andrew Watrous, Morgan Stanley’s G10 Currency Strategist.

Republican nominee former President Donald Trump has supported a weaker U.S. dollar, contending that it would encourage exports. However, Morgan Stanley Research analysis indicates that the currency is likely to gain strength if he retakes the White House and boosts import tariffs, as promised on the campaign trail: As other countries start to feel the pain of the goods surcharges, investors could view the U.S. as a more stable destination for their money. Conversely, a victory by Vice President Kamala Harris could weaken the dollar: Investors may see less opportunity to reap a premium, since less-adversarial trade policy could diminish the need for a hedge against volatility elsewhere.

“Beyond campaign-trail rhetoric on trade policy, a broad range of fiscal, regulatory and national security policy choices can move the U.S. dollar by affecting expectations for economic growth, commodity prices and risk demand,” says Ariana Salvatore, Morgan Stanley policy strategist.

Here’s what investors need to keep in mind.

Uncertainty vs. Continuity

U.S. presidents have significant discretion over trade policy, unlike other policy domains, making this one of the central avenues by which the November election could influence exchange rates. Morgan Stanley Research analysis suggests that Trump’s reelection would bring uncertainty in trade policy and geopolitics that would support the dollar.

“For instance, Trump has already said he would raise tariffs on Chinese imports to 60% or more if he is reelected. If polls show that his reelection is likely as we get closer to Election Day, it could send the dollar higher,” says Watrous. “The prospect of tariffs could weigh on growth expectations outside the U.S. Additionally, foreign officials may seek to weaken their own currencies to offset the effect of tariffs on their economic growth.”

The greenback rose in the months following Trump’s surprise 2016 victory over Democrat Hillary Clinton and rose roughly 3% from the time of the 2016 election to the onset of the COVID-19 pandemic. In 2018 and 2019, when the Trump administration levied tariffs on thousands of products, the dollar was likely boosted by the effects of the uncertainty on consumption, investment, monetary policy and risk demand, as well as policy-driven currency depreciation by U.S. trading partners.

A second Trump administration may also result in significant fiscal expansion through more spending and debt—especially if the Republican Party also controls both houses of Congress. That outcome would likely boost the dollar by raising expectations for U.S. economic growth.

By contrast, a Harris victory is expected to bring policy continuity from the Biden administration, under which uncertainty on fiscal and tax policy has appeared to correlate to mild dollar weakness. Meanwhile, Harris is expected to seek less fiscal expansion than Trump, which would bring less growth and in turn weigh on the dollar. Democratic control of the White House and Congress would have similar effects.

In the event government is divided—that is, if the opposing party controls one or both houses of Congress—there is likely to be limited impact on the dollar’s strength, as Morgan Stanley economists don’t see a significant difference in public spending regardless of which party wins the executive branch.

Fed Independence and Intervention

Investors worldwide have been glued to signals from the Federal Reserve in anticipation of long-awaited interest rate cuts, and were generally pleased when the central bank’s Federal Open Market Committee brought down the fed funds rate by 50 basis points on Sept. 18. In this election year, both the Fed’s moves in the near term and whether its independence could be at risk from White House influence in the future have captured market interest.

The Fed is a quasi-independent government agency, but the central bank’s chair and board are selected by the president and confirmed by the Senate. With Chair Jay Powell’s term up in January 2026, the winners of the next election will determine the Fed’s next leader.

That said, Morgan Stanley Research continues to see the risk for a wholesale shift in monetary policy as overstated, given that changes in the Fed’s scope and authority face many hurdles.

Additionally, investors have questioned whether a Trump administration would seek to intervene to mitigate a strengthening dollar in other ways, such as reducing tariffs on one or more key trading partners. However, Morgan Stanley analysis points to minimal effects from any such moves.

Regardless of the outcome of the November election, investors should prepare for plenty of volatility ahead in foreign exchange markets.

“It could take days after the election before the world will know who won, and during such a delay, either candidate could appear to be ahead at different points in the vote counting,” says Salvatore. “A delayed or even contested election may drive sharp movements in the dollar. Volatility was elevated following the 2016 and 2020 general elections, and we may be in store for the same this year.”

For deeper insights and analysis, ask your Morgan Stanley Advisor or Financial Representative for the full report, “The White House and The Dollar,” (Aug. 6, 2024).