Financial Market Dynamics Ahead of U.S. Elections
As the U.S. elections on November 5 approach, financial markets are closely monitoring potential changes in economic policies that could influence the dollar and gold prices. If one party wins the presidential election, differing scenarios are expected regarding these key assets.
The Dollar’s Dual Nature
“The US dollar has a dual character, meaning it has a cyclical nature, while also being the ultimate safe haven currency,” stated an economist at ABN AMRO who provided insights in a note.
This duality suggests that during strong economic growth—especially when it outpaces inflation, real interest rates are positive, and fiscal and current account balances improve—the dollar typically rallies.
Conversely, in times of intense market stress and liquidity shortages, the dollar’s role as a safe haven becomes crucial, increasing its value as investors seek stability.
Democratic Victory Impact
A Democratic victory in the upcoming election, whether complete or partial, is expected to have a limited influence on the U.S. dollar.
According to ABN AMRO Bank, under a Democratic administration, inflation is likely to decrease, but policy rates may drop even faster, resulting in lower real rates, generally seen as unfavorable for a currency.
A slight deterioration in fiscal balance may put some downward pressure on the dollar; however, the overall effect is expected to be minor, leading to a relatively stable dollar with only minor fluctuations.
Republican Victory Impact
In contrast, a Republican victory could prompt greater volatility in the U.S. dollar. Initially, the dollar might gain strength due to expectations of stricter trade policies, such as introducing tariffs that could improve the trade balance.
Moreover, rising inflation and swift interest rate hikes compared to other nations would further support the dollar.
However, this short-term surge could be temporary. As the wider economic repercussions of these policies emerge, the dollar may face a decline over the long term.
Should a Republican administration implement extensive tariffs—a so-called “Hard Trump” scenario—the gap between U.S. and European monetary policies could become pronounced since the euro’s inception in 1999.
This could lead to a depreciation of the euro against the dollar, potentially driving the EUR/USD exchange rate below parity.
Yet, as market sentiment stabilizes and the adverse impacts of these policies start affecting the economy, the initial dollar strength may reverse, resulting in marked dollar weakness.
Gold Market Outlook
As for gold, this precious metal has long been seen as a safe haven during economic uncertainty.
However, recent years have brought changes to the gold market dynamics, notably due to the rise of gold ETFs, which have turned gold into a more speculative asset, heavily influenced by investment flows, U.S. dollar movements, and real interest rates rather than just its traditional safe haven role.
If the Democrats win, “we think gold prices could be very modestly supported because we expect a modest decline in or a neutral dollar and some lower real yields. We anticipate gold prices to remain around USD 2,500 per ounce,” said an economist at ABN AMRO Bank.
On the other hand, a Republican victory, especially one that results in widespread tariffs, may complicate the situation for gold. In the early years of such an administration, rising inflation and increasing interest rates could strengthen the dollar, potentially pulling gold prices below their 200-day moving average, down to $2,000 per ounce.
Nevertheless, as the dollar’s initial strength dissipates and real interest rates drop, gold prices are likely to rebound, possibly surpassing the highs seen earlier in 2024.
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