UNITED STATES—The U.S. dollar sits at the heart of global finance, and every presidential election brings uncertainty that can shake its position. The upcoming 2024 election could have meaningful consequences for the dollar as economic policies come under the spotlight and markets assess how each candidate’s proposed measures might reshape the financial landscape. From potential tariffs to shifting trade relations, let us explore how the election might shape the dollar’s value.
Setting the Stage: A Complex Economic Backdrop
The 2024 election arrives amid a mixed economic landscape. Inflation remains above the Federal Reserve’s target range despite aggressive interest rate hikes since early 2022. These hikes have kept the dollar strong, drawing investors or retail traders in forex trading who are seeking higher yields in dollar-denominated assets.
Recently, the 10-year U.S. Treasury bond yield has held positive territory above 4.3%, following fresh inflation data that underscored the challenges facing policymakers. Treasury yields offer a benchmark for many investors, and their movement directly affects the dollar. Higher yields often bolster the dollar by attracting global investors to the U.S. financial markets, further strengthening the currency.
But inflation isn’t the only concern; U.S.-China relations remain tense, with tariffs and trade policies influencing import and export costs. Additionally, rising U.S. debt levels have prompted discussions about the sustainability of fiscal policies, particularly as each candidate hints at potential economic strategies.
Key Issues Impacting the Dollar: Trade, Tariffs, and Inflation
One of the most talked-about policies on the campaign trail involves tariffs, particularly proposals from candidate Donald Trump. Trump has floated the idea of universal tariffs, suggesting a 20% tax on all imports and a steeper 60% tariff on Chinese goods. He describes this as creating a “ring around the country” to encourage domestic production and curb reliance on imports. Some analysts argue this could drive inflation higher by increasing costs on imported goods, which would counter the Federal Reserve’s disinflation goals.
The head of the Institute of International Finance has noted that such extreme tariffs could disrupt the U.S.’s current disinflationary trajectory. Tariffs of this magnitude would likely lead to higher costs for U.S. consumers and businesses alike, pushing inflation upward. In response, the Fed might find itself under pressure to continue raising rates to counter inflationary effects, which could affect the dollar’s strength in complex ways. In the short term, the dollar might strengthen as higher rates attract foreign capital, but prolonged inflationary pressure could eventually weigh on the currency.
Potential Scenarios and Their Implications for the Dollar
The election results will shape economic policy in the coming years, and different paths could lead to different outcomes for the dollar. Two main scenarios outline what might be in store.
Scenario 1: Continuation of Current Policies
If the election leads to a continuation of current trade and fiscal policies, the dollar could see a more stable trajectory. This scenario would likely mean fewer major shifts in international relations or economic regulation. In this environment, the dollar would remain influenced primarily by the Federal Reserve’s interest rate decisions and inflation data, with fewer disruptions from sudden policy changes.
Under these conditions, the dollar’s performance would reflect typical market factors, such as inflation, interest rates, and global demand for the currency. For international investors, this scenario might provide a sense of continuity, supporting the dollar’s value.
Scenario 2: Emphasis on Protectionism and High Tariffs
On the other hand, a more protectionist approach involving universal tariffs and a reduction in foreign trade reliance could lead to different outcomes. Initially, such policies might buoy the dollar by spurring domestic production and investment, potentially creating a stronger economic foundation within the U.S. However, this approach risks sparking inflation as import prices rise. If inflation jumps, the Fed may face pressure to raise interest rates further to prevent economic overheating, which could have a mixed impact on the dollar.
This approach may also introduce volatility, especially if foreign trade partners retaliate with their tariffs or other measures. The long-term impacts could see a more volatile dollar as markets adjust to new trade norms and potentially higher inflation.
Gold as a Hedge
Gold (XAU/USD) reached an all-time high in Q3 2024, and is currently hovering near $2,750 per ounce. The precious metal surged in recent months, reaching a record $2,790 before retracing slightly. This rise highlights gold’s appeal as a hedge against both inflation and dollar fluctuations. As a general practice, when inflation pressures rise, or when the dollar shows signs of weakening, investors often turn to gold to preserve value.
Since the election could introduce uncertainty and even higher inflationary pressures, gold might see increased demand that would drive its price higher.
Final Thoughts
Market participants face a challenging period as election uncertainties intersect with ongoing economic pressures. While it’s difficult to accurately predict the outcome of the elections or how this would impact the U.S. dollar, the best way to stay protected is to manage risk and stay informed.
