The value of the dollar has taken a hit this year as the coronavirus pandemic ravaged America’s economy. Conventional wisdom holds that a Biden presidency would drag the US currency down further. But there’s nothing conventional about 2020 — some argue a Biden win would actually boost the dollar.
The US Dollar Index, which tracks the greenback against the euro, yen and four other major currencies, is down 3% this year. That’s a fairly big move in the normally sleepy world of currencies.
In theory, a Biden win could reduce the value of the greenback even more. A President Biden would likely spend more on stimulus, both for Covid-19 relief and potentially on infrastructure — especially if there is a blue wave that leads to Democrats taking control of the Senate.
More spending could weaken the dollar, especially if Biden also looks to roll back some of Trump’s tax cuts. That could reduce corporate and consumer spending.
But conventional wisdom may no longer apply. The US Dollar Index has fallen more than 7% since Trump’s inauguration.
‘Sanity premium’ for the dollar under Biden?
Low interest rates are one factor behind the dollar’s weakness. But some economists and market strategists argue that the dollar has also been hurt by Trump’s penchant for trade wars with, well, just about everyone because of his “America First” philosophy.
A Biden win could restore more conventional trade relations with the rest of the world, which might lead to what some have dubbed the “sanity premium” on the US dollar.
“The dollar has bottomed,” said Rob Emrich, founder and managing partner of Acruence Capital. “Rational is a word people use when talking about Biden versus Trump. Under Biden, trade policy could be aligned more with historical norms whereas you have an erratic leader now.”
The US also continues to post a trade deficit, as American consumers buy more imported goods. The dollar often weakens when there is a trade deficit.
Investing experts are also hopeful that Biden won’t radically revamp the tax code. That would also be good for the dollar, especially if Biden is able to restore fractured trade relations.
“The increase in tax rates might be minimal and the offset to that is a more constructive trade policy,” said Hank Smith, head of investment strategies at Haverford Trust.
“If you think about the past three and a half years, the uncertainty about trade to some degree tempered the benefits from tax reform and regulatory reform,” he said.
In other words, you can’t look at just interest rates and taxes in isolation to figure out what’s next for the dollar.
More stimulus could also boost the economy — and the dollar.
“The narrative in the past week has swung full circle from ‘beware a blue wave and Biden because of higher taxes and more regulations’ to ‘a Biden win could mean a huge stimulus package,’” Smith added.
“Ultimately, what is most important for the direction of the dollar is the perceived strength of the US economy. We would welcome the unleashing of pent-up demand from more stimulus,” he said.
More stable economy could boost the dollar and stocks
Emrich also pointed out that any stabilization of the US economy would be good for the dollar because it would lead more global central banks to buy dollars to hold in their reserves. The dollar would be a more attractive option than the euro, yen, yuan or other major currencies.
“A majority of central banks still have the dollar as their reserve currency. It’s still the ‘cleanest dirty shirt,’” Emrich said, making reference to a Kris Kristofferson song lyric popularized by Johnny Cash.
“Many foreign governments have to own the dollar. They have no other choice,” Emrich added.
Not everyone is convinced that a Biden victory would boost the dollar. Still, the lack of a rebound for the dollar may not be a bad thing for stocks.
Clifton Hill, vice president and portfolio manager of multi-asset class strategies at Acadian Asset Management, said he agrees that a Biden win could lead to more stability on the trade policy front.
But he argues that a Biden presidency would boost blue chip stocks more than the dollar.
“There could be a relief premium if Biden wins because of trade. But we might see that rally more in the stock market than the dollar,” Hill said.
A weaker dollar also tends to make US exports more attractive to overseas consumers, boosting the sales and profits for multinational corporations. So it may not be in America’s best interests to see the dollar’s value skyrocket. But Hill said stability for the dollar and stocks would be a good thing.
