Traders wanting to know what Novembers U.S. presidential election will mean for the dollar need look no further than the U.K.
The pound plunged to a seven-year low and volatility soared, exceeding all other Group-of-10 nations, on risks created by a referendum on European Union membership. Given the tough talk on dollar strength from candidates vying for the White House, the greenback is just as vulnerable to politics, according to Deutsche Bank AG, JPMorgan Chase & Co. and Standard Bank Group Ltd.
Republicans and Democrats have each accused China of purposely weakening its currency to gain a trade advantage, reflecting voter unease linked to a 14 percentslidein manufacturing jobs during the past decade. As rhetoric becomes action, countries that have sought more competitive exchange rates will be in the firing line, spurring foreign-exchange volatility,Deutsche Banks Alan Ruskin wrote in a May 6 note.China, Japan and Germany were placedon a currency manipulator watch list by the Treasury Department last month.
Given that there is an anti-globalization, anti-free trade strain thats running through the American electorate, the strong dollar is going to be a potential victim, said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees about $236 billion. The markets will start to price in a risk premium for the U.S. dollar and for U.S. financial markets.
Brexit Precedent
Upadhyaya, who holds a degree in economics and international relations and worked at Putnam Investments LLC in the mid-1990swhen the U.S. was embroiled in a battle with Japan about cheap vehicle imports, sees the dollar weakening versus the euro, yen and sterling.
JPMorgans John Normand,head of foreign exchange, commodities and international rates research, says investors should favor the euro and yenshould any trade conflicts emerge post election. Steven Barrow atStandard Bank warns ofa pre-vote wobble for the dollar — reminiscent of the pounds response to Brexit — and a 20 percent slide for the greenback within months if Donald Trump were to win the White House.
Volatility Rises
The sudden realization that politics left the pound exposed came in February when British politicians settled on June 23 for a long-discussed referendum on exiting the worlds largest single market. Sterling volatility jumped by the most since 1998 on March 23, precisely three months before the vote.
The dollars day of reckoning may come as early as July, when the Republican and Democratic parties hold conventions to formally select candidates. Trump is the presumptive nominee for the Republicans while Hillary Clinton leads for the Democrats. Dollar-yen volatility has climbed an average 1.6 percentage points in the three months before presidential electionsover the past two decades, options prices show.
Too strong a dollar has already come into the frame as an issue, said Ruskin, the New York-basedglobal co-head of foreign-exchange research at Deutsche Bank, the worlds second-largest currency trader. Anything that is disruptive to trade or is perceived as likely to be disruptive to trade is a new source of uncertainty.
Grand Master
Trump this month called China the grand master of devaluation, saying the country is killing the U.S. on tradeand that dollar strength damages American competitiveness. Clintonplansto take on foreign countries that keep their goods artificially cheap by appointing a trade prosecutor and adding penalties, according to a campaign website.
U.S. manufacturing jobs have tumbledto about 12.3 million last month from 14.2 million in April 2006,datafrom the Bureau of Labor Statistics show, with many of those jobs movingoffshore. Automakers includingGeneral Motors Co. and Ford Motor Co. have shifted production abroad, with GMimportingmodels made in China and Fordcreating2,800 jobs at a new$1.6 billion factory in Mexico. The U.S. trade deficit has grown to $40 billion, from $7.8 billion two decade ago.
Most of the outcry is among domestic manufacturers who are finding it hard enough to compete against what they feel are unfairly priced Chinese products and then, to make matters worse, they dont see the yuan as free-floating, saidDavid Schwartz, a partner at Thompson Hine LLP law firm who specializes in trade disputes. Our major trading partners, if nothing else, have been put on notice.
Watch List
China, Japan and Germany — plus South Korea and Taiwan — meet two of three criteria used to categorizeunfair practicesunder a law enacted in February, the Treasury said last month. Nations that tick all three boxes would face remedial action,” with the president empowered to end trade negotiations or withhold project finance.
The election takes place against a constructive economic backdrop thats supported a 18 percent gain by the dollar during the past two years as investors flock to the U.S. seeking higher yields relative to Europe and Japan.
That raises the stakes for many nations — from Australia and New Zealand to Switzerland and Canada — that have deployed wave after wave of stimulus to try to resurrect their slowing economies from the hangover of the financial crisis. Lower interest rateshelp foster domestic inflation partly by spurring currency depreciation, which also makes exports more competitively priced versus international peers.
Theres a higher bar to intervention and more pressure on the yen to strengthen as a result, said Chris Turner, the London-based global head of strategy at ING Groep NV.
Currency wars have played out globally, but U.S. protectionism hasnt been an issue, said Turner,whos been analyzing markets for 25 years. You hope youre not going back to those dark days of the early 1990s because protectionism is bad for everyone but, listening to some of the speeches from the candidates at the moment, you might have a small amount of concern.”
