Stock markets are rallying today as polls opened across the U.S. and Americans head to cast their ballot for the next U.S. president.
Apart from the devastation caused by the coronavirus pandemic, the U.S. election has been the second-biggest source of uncertainty for global currency markets as prospects for drastic policy change weigh on the dollar.
The greenback strengthened over the past week, despite being down today, hitting one-month highs on Monday. However, it is still down by about 10 percent from its highs in March.
Democratic challenger Joe Biden is ahead of President Donald Trump in the polls, with an 8.6 percentage point lead according to FiveThirtyEight.
But the election outcome may be tighter, with closer races in several battleground states, where the result will ultimately be determined due to the electoral college system.
Four years ago, then-Democratic nominee Hillary Clinton was ahead of the president in the polls but still lost the election.
"Volatility is rising because liquidity for hedges around the election is very thin. Everyone's the same way, there's no one selling this stuff thinking everything's great," said Jordan Rochester, forex analyst at foreign exchange platform Nomura, in a note.
As the results draw closer, Monex Europe, a leading specialist in commercial foreign exchange, released an analysis on how the election day results could affect the dollar.
Over this year the dollar has weakened on the back of a dovish policy turn from the Federal Reserve and mismanagement handling the pandemic.
Ranko Berick, head of market analysis at Monex, said it is possible that the dollar "is now trading with a 'Trump risk premium'".
"A Biden win could improve the outlook for macro growth in the U.S. due to better pandemic management," he said. "In my opinion, it would be mildly positive for the dollar versus G10 currencies."
However, other analysts have argued that a Biden win may weaken the dollar due to his big stimulus proposals.
Monex's analysis calls a Trump win a "status quo outcome," meaning that the current dollar weakness would likely remain.
"However, uncertainty over trade policy would persist, potentially hampering a likely recovery in risk appetite in 2021," Berick said. "In the event of a Republican sweep, new and uncertain risks would be introduced to markets."
With that said, Trump has railed against a strong dollar throughout most of his term as president in a pre-pandemic world. He often stated that a strong dollar provides other countries with a competitive advantage, making it difficult for U.S. manufacturers.
Last year he tweeted that he was not happy with a strong dollar.
Markets hate uncertainty, so the risk of a serious constitutional crisis is "likely to hammer the dollar," Berich says.
He added: "For reference, the pound to dollar exchange rates approached 10 during the U.S. civil war. The impact is likely to worsen the longer the crisis drags out."
Regardless of the outcome of the election, the U.S. dollar will continue to be affected by the ongoing spread and/or control of the pandemic, and the development of a vaccine.
Source: Newsweek