JPMorgan predicts the U.S. dollar is likely to strengthen due to the potential for a divisive U.S. election contest between President Joe Biden and former President Donald Trump. The bank believes such a contest would raise the prospects of a trade war, and investors should pay attention to the impact of potential trade tariffs on currencies. The strategists at JPMorgan suggest renewed tariff risk would be supportive for the dollar. While the focus has been on the Chinese yuan, there is the possibility of the impact broadening to other foreign exchange rates.
The bank notes that if the current polling trends persist, a Biden/Trump matchup is likely, and it points out that under Biden’s leadership, tariffs imposed by Trump have largely remained in place. JPMorgan emphasizes that any expansion of U.S. tariffs on nations and trading blocs beyond China, including Europe, Mexico and broader Asia, could significantly affect the strength of the dollar. They estimate a universal 10% tariff could boost the trade-weighted value of the dollar by 4% to 6%, impacting growth-sensitive currencies in a widening trade war.
However, the bank suggests that fiscal policy may have less impact on currency markets as the election unfolds. While fiscal changes were significant factors in foreign exchange risk during previous elections, it’s less clear now whether fiscal policy can distinguish U.S. growth from that of other countries.
