The 2024 US Presidential Election And Impact on the U.S. Dollar

The 2024 United States (U.S.) presidential election will be held on November 5, with voters selecting electors for the Electoral College to decide the president and vice president. President Joe Biden initially sought re-election but withdrew, endorsing Vice President Kamala Harris as the Democratic nominee. Former President Donald Trump is running for a second, non-consecutive term as the Republican candidate. This election coincides with congressional and gubernatorial races, with significant issues like the economy, healthcare, and climate change at the forefront.

Due to these major events, strong volatility is expected in the financial markets driven by the ongoing global geopolitical crisis, trade tensions between China and the USA, and economic uncertainties in the U.K. and Europe. This volatility has caused significant movements in major stocks, commodities, and financial instruments related to these events. This article discusses the presidential election, its correlation with the Federal Funds Rate and inflation, and the impact on the U.S. Dollar Index, which may influence other related instruments in the financial market.

U.S. Dollar Trends Across Different Presidencies

The chart below presents the relationship between U.S. presidential terms, the Federal Funds Rate, and the U.S. dollar index from the 1980s to the present. During Ronald Reagan’s presidency from 1981-1989, there was a significant increase in the U.S. dollar index, particularly in the initial years of his term. This period was marked by high interest rates set by the Federal Reserve to combat inflation, making the USD more attractive to investors. The strong dollar hurt U.S. exports, and trade deficits became a concern. By the mid-1980s, the Plaza Accord was implemented to devalue the dollar, leading to its decline toward the end of Reagan’s term. The chart shows that the U.S. dollar index decreased by over 40% during the late 1980s.

Similarly, during George H.W. Bush’s presidency from 1989 to 1993, the USD continued its downward trend, affected by the recession in the early 1990s and the Gulf War. The Federal Reserve cut interest rates during this period to stimulate the economy, contributing to a weaker dollar. During Bill Clinton’s presidency from 1993-2001, the USD experienced a strengthening phase in the late 1990s due to economic growth and a strong stock market driven by the tech boom. The Federal Reserve gradually raised interest rates in response to a booming economy and rising inflationary pressures, leading to a stronger USD. The USD strengthened following the early 2000s recession and the Fed’s rate cuts but weakened significantly due to the Iraq war, growing budget deficits, and the 2008 financial crisis.

During Barack Obama’s presidency from 2009-2017, the USD remained relatively stable, with fluctuations influenced by the Federal Reserve’s monetary policies, including quantitative easing (Q.E.) programs. The USD began to strengthen again in the latter part of Obama’s term as the Fed ended Q.E. and started to raise interest rates. During Donald Trump’s presidency from 2017 to 2021, the USD initially strengthened with Trump’s tax cuts and expectations of pro-business policies but weakened later due to trade tensions and Fed rate cuts in response to slowing economic growth. The pandemic in 2020 led to significant Fed rate cuts, which weakened the USD.

Under Joe Biden’s administration since 2021, the USD has experienced some volatility. The Federal Reserve started to taper its asset purchases and signal future rate hikes due to rising inflation which strengthened the dollar. Market expectations about the Fed’s tightening cycle and economic recovery have significantly influenced USD movements during this period.

Federal Reserve Rate Reduction During Biden’s Term

The Federal Reserve cut interest rates by 50 basis points in September 2024, marking the first rate cut during Biden’s administration since 2020. This rate cut reflects an effort to mitigate economic concerns related to the cost of living, a significant issue throughout Biden’s presidency. It indicates a potential easing of inflationary pressures, which factors like supply chain disruptions and geopolitical tensions have escalated. This move signals that the Federal Reserve prioritizes controlling inflation and supporting economic growth, aiming to navigate toward a “soft landing.”

This rate cut before the U.S. election raises questions about its influence on public perception. Historically, changes in interest rates take time to impact the broader economy. Therefore, while mortgage rates and other borrowing costs may decrease, providing relief to consumers, these effects might not be fully realized before election day. As a result, the potential benefits of the rate cut might not immediately impact voters.

The Federal Reserve’s rate cut decision is data-driven, with the current decision influenced by the decline in inflation, suggesting that the central bank is responding to changing economic conditions and aiming to support sustainable growth while mitigating any further economic downturns.

Inflation Shifts During Trump and Biden Presidencies

The chart below shows U.S. inflation trends across various presidencies since the 1980s. During Donald Trump’s presidency, inflation mostly stayed close to the Federal Reserve’s 2% target, with some ups and downs. The biggest increase happened after the Trump Tax Cuts, with the Consumer Price Index (CPI) briefly reaching 3% before returning to the target range. In Trump’s last year, the COVID-19 pandemic caused a sharp drop in inflation as the economy slowed. In response, the Federal Reserve cut interest rates to nearly zero to prevent a recession.

During the pandemic, the Trump administration introduced stimulus measures. These measures were aimed at helping households and businesses. As a result, there was a gradual increase in inflation. By the time Joe Biden assumed office, the ongoing impact of the pandemic and further stimulus efforts, including those under Biden’s administration, sustained this upward pressure on prices. The situation was made worse by supply chain bottlenecks, shortages of important materials, and tensions between Russia and Ukraine. Rising oil prices due to the war further supported the inflationary pressures, leading to a notable increase in the CPI in the initial phase of Biden’s presidency.

Biden’s administration introduced the Inflation Reduction Act of 2022 to address this rising inflation. This legislation aimed to mitigate long-term inflation by cutting the federal budget deficit, reducing prescription drug costs, and promoting domestic and clean energy production investments. Following the inflation peak in early 2022, the FOMC took decisive action, raising interest rates 11 times within two years to guide inflation closer to the desired 2% mark. With inflation standing at 3.4%, there is ongoing debate among market participants about the direction of the Fed’s rate cuts in 2024, coinciding with the final year of Biden’s current term. The first rate cut measure was taken in September 2024, which has triggered volatility in stocks and commodities.

Moreover, the job market also displayed distinct patterns under the Joe Biden and Donald Trump administrations. During Trump’s tenure, job openings steadily grew until late 2018, reaching a peak of 7.6 million, before declining by about 900,000 in 2019. The pandemic resulted in a sharp contraction in job numbers; however, job openings rebounded to levels similar to the averages seen during Trump’s office. On the other hand, Biden’s presidency witnessed a significant surge in job growth, with openings peaking at 12 million in March 2022, followed by a subsequent decline to around 9 million. This strong employment growth was fueled by the post-pandemic economic recovery and fiscal policies such as the American Rescue Plan Act, contributing to both the labor market’s recovery and the complexities surrounding inflationary trends.

Technical Outlook for the U.S. Dollar After the 2024 Election

The technical outlook for the U.S. Dollar Index is presented in the monthly chart below. It shows that the U.S. dollar broke out of a long-term downtrend line during Barack Obama’s tenure in 2015. Following this breakout, the index fluctuated and returned to the breakout zone before initiating another strong rally during Joe Biden’s presidency. Since breaking the long-term trendline, the index has been trading within the blue channel. The strong rally in the U.S. dollar, which coincided with high inflation and rate hikes, has already reached the upper target of this blue channel. The index is currently declining in terms of the channel’s support. Recent price patterns following the peak at the blue channel suggest weakness, indicating that the U.S. dollar is moving toward a significant support level.

The formation of a double top around the 107 level after a peak of 114.75 indicates underlying weakness in the U.S. dollar. Furthermore, the index has been fluctuating within wide ranges. The Federal Reserve’s recent rate cut of 50 basis points in September has added to the volatility, causing a temporary rebound in the index. Despite this rebound, the overall technical picture for the U.S. dollar remains bearish, with the index showing signs of continued decline toward its support level.

Conclusion

In conclusion, the 2024 U.S. presidential election presents a complex interplay of political, economic, and market factors. The transitions in leadership, from Trump to Biden, have been marked by shifts in monetary policy, inflation trends, and market volatility. The Federal Reserve’s recent interest rate cut highlights the central bank’s response to economic conditions. The financial markets remain sensitive to policy changes and global events as the election approaches. This ongoing volatility presents the influence of fiscal and monetary policies on market dynamics and investor sentiment.

As the election approaches, there is likely to be strong volatility across the forex and commodity markets. The U.S. dollar remains under pressure leading up to the election. The initial rebound in the U.S. dollar after the interest rate cut on September 18 may limit further gains until the final election results are revealed. U.S. dollar-related currencies like EUR/USD, GBP/USD, and USD/CHF also trade at critical levels. EUR/USD has broken through long-term resistance, while GBP/USD is on the verge of a long-term technical breakout. Additionally, USD/CHF is close to breaking out of a 13-year consolidation. All these factors suggest that a breakdown in the U.S. dollar index could trigger significant movements in these instruments.