As the U.S. presidential election approaches, recent developments have shown that Donald Trump’s previously anticipated victory is far from guaranteed, sending ripples through global markets. On Monday, the dollar experienced a notable weakening, while U.S. Treasuries gained ground as investors began scaling back their bets on a Trump win.
The dollar dropped 0.5% against a basket of major currencies, setting it up for its largest one-day decline since August. Meanwhile, the euro appreciated by 0.5% against the dollar, reaching $1.09. This shift in currency movements indicates a reassessment of the electoral outcome, driven largely by a surprising surge of support for Democratic nominee Kamala Harris, particularly in states previously leaning towards Trump.
Kamala Harris’s Unexpected Support Shakes Market Expectations
Over the weekend, a widely-respected poll conducted by non-partisan pollster J. Ann Selzer revealed an unexpected uptick in Harris’s support in Iowa. This poll, often considered the “gold standard” in the state, showcased a narrowing lead for Trump, creating a shift in market sentiment. Previously, Trump’s rising poll numbers had inflated market confidence, with traders building in a “Trump premium” to the dollar’s value.
According to Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays, this premium accounted for roughly a 3% increase in the dollar index. “If Harris pulls off a win, we could see much of that premium unwind,” Kotecha remarked. The dollar’s decline signals investor caution, as confidence in a Trump victory has wavered just days before the election.
Historical Context of Election-Driven Market Volatility
Market volatility surrounding U.S. elections is not a new phenomenon. In 2016, as uncertainty loomed over Trump’s unexpected rise in the polls, markets similarly saw fluctuations in the dollar, treasuries, and equities. Likewise, in 2020, pre-election uncertainty led to a spike in volatility, as investors grappled with uncertain outcomes. By providing historical context, investors can see that market reactions to elections often follow patterns, with currency weakness and a shift toward safe-haven assets being common during times of electoral uncertainty. This historical perspective adds depth to the current market’s behavior, reinforcing that even a seemingly strong candidate like Trump can face growing risks close to election day.
Market Moves Reflect Shifting Election Odds
Investor sentiment has shifted rapidly, not just in currency markets, but across various asset classes. Betting markets have notably adjusted, with the odds of a Trump victory falling from 64% to 55% on the U.S. futures exchange Kalshi and from 67% to 57% on the cryptocurrency-based Polymarket. This stark decline in betting odds underscores the growing uncertainty surrounding the election.
The outcome of the election will have profound implications on U.S. policy, especially regarding trade, taxes, and inflation. A Trump win, especially if Republicans gain control of Congress, would likely continue the implementation of trade tariffs and tax cuts, contributing to inflationary pressures. This could force the Federal Reserve to reconsider aggressive interest rate cuts, despite expectations that it will lower rates by 0.25% after the election.
The Broader Implications of a Trump vs. Harris Presidency
The market is highly reactive to the potential differences between Trump and Harris’s policies. Trump’s continued focus on trade tariffs, deregulation, and corporate tax cuts is seen as favorable for industries like defense, technology, and energy. However, inflation risks would rise, potentially putting pressure on the Fed to act cautiously on interest rate cuts. On the other hand, Harris’s policies may focus more on regulation, climate initiatives, and corporate taxation. This could create opportunities for sectors like renewable energy, healthcare, and tech, but may also slow growth in traditionally deregulated sectors. These different approaches add to the uncertainty, and markets are carefully balancing the potential outcomes.
Market Sentiment and Investment Strategies Amid Uncertainty
Amid this political uncertainty, many investors are adopting a “wait-and-see” approach. Safe-haven investments, such as U.S. Treasuries, gold, and even the Japanese yen, have seen increased demand as investors brace for potential volatility. Institutional investors are also employing hedging strategies through options and futures, seeking to protect their portfolios regardless of the election outcome. For individual investors, this environment highlights the importance of diversification and risk management, especially as market conditions remain fragile leading up to the election.
Impact on Global Markets and Trade Relationships
The election’s outcome could significantly alter U.S. trade relationships, especially with key partners like China and Mexico. A Trump victory could mean a continuation of his trade war with China, further straining global supply chains and potentially leading to a decline in international trade. Conversely, Harris might take a more diplomatic approach, working to repair relations and stabilize markets. The Mexican peso, often seen as a barometer for Trump’s policies on trade, has already strengthened 1.1% against the dollar, indicating that markets are pricing in the reduced likelihood of tariffs on Mexican goods.
Federal Reserve’s Role and Monetary Policy
The Federal Reserve’s role in managing inflation and interest rates remains a critical focus for markets. A Trump victory could lead to sustained pressure for lower interest rates and additional fiscal stimulus, which could fuel inflationary pressures. Harris, however, might adopt a more cautious approach, prioritizing fiscal responsibility and focusing on addressing long-term economic challenges like income inequality and climate change. Investors are closely watching how either candidate might influence Fed policy, especially with a potential rate cut looming post-election.
The Role of Polling Data and Market Reactions
The reliability of polling data has become a significant factor in market behavior. While markets are reacting to polls showing a surge for Harris, the 2016 election is a stark reminder that polls are not always predictive. The disparity between market expectations and polling data has led to heightened volatility, as investors try to navigate conflicting information. This adds another layer of complexity, as traders and institutional investors attempt to balance the potential for a polling error with their need to prepare for different outcomes.
Cryptocurrency and the Election
The cryptocurrency market has also been heavily influenced by political developments. Bitcoin’s decline of 1.3% on Monday reflects the market’s recalibration as Trump’s victory becomes less certain. Trump’s favorable stance toward cryptocurrencies, including his promise to roll back regulations, has won him support from Silicon Valley investors. A Harris victory, however, could lead to a more cautious regulatory approach, impacting the broader crypto ecosystem. As cryptocurrencies become more mainstream, their performance is increasingly linked to political outcomes, making this election crucial for the future of digital assets.
Geopolitical Risks Tied to the Election
The global geopolitical landscape will also be affected by the election’s outcome. Trump’s more isolationist policies, particularly regarding NATO and U.S. involvement in foreign conflicts, could lead to greater instability in regions like the Middle East and Eastern Europe. Harris, on the other hand, is likely to adopt a more multilateral approach, fostering international cooperation but potentially leading to slower market growth as the U.S. focuses on diplomacy over aggressive economic policies. This global dimension further complicates market predictions, as international risks become intertwined with domestic political uncertainty.
Conclusion
As the election approaches, the markets are clearly reflecting the increasing uncertainty surrounding a Trump victory that once seemed more assured. Whether it’s in the currency markets, equities, or safe-haven assets, investors are adjusting their positions in response to shifting poll numbers and potential policy outcomes. With so much at stake, market volatility is expected to continue, especially as investors grapple with the broader implications of a Trump or Harris presidency.
About Author
