One Wall Street strategist calls the dollar’s slide against other major currencies this month “weird” and suspects it may be due to a sudden turn in the U.S. presidential campaign.
"The USD's weakness since early August is a bit odd in our view, given that during this period US data (retail sales, jobless claims, services ISM) have pointed to a return to relative strength despite the recession fears that had spread in late July and early August," Thierry Wizman, global FX and rates strategist at Macquarie, said in a note on Tuesday.
But he wrote: "We believe the growing prospects of a Democratic victory in the presidential election may be responsible for the dollar's weakness since late July."
Weitzman believes that's because Trump's policy proposals, including expanded tariffs and immigration restrictions, are seen as potentially more inflationary than what Harris is proposing. That, in turn, would mean the Fed would need to keep interest rates higher than it already is to provide support for the currency.
The dollar index, which measures the greenback against a basket of six major currencies, has fallen 2.4% so far in August and is close to lows seen in early January.
The violent unwinding of yen carry trades earlier this month also helps explain the dollar’s weakness, which has fallen 2.6% against the yen so far this month. But the dollar’s weakness is broader, with the euro up 2.5% in August, the pound up 1.2%, and the Australian and New Zealand dollars also up.
Weitzman noted that the dollar's decline in August came as polls began to show that Republican candidate Trump would be in a tighter race with Vice President Harris than with President Biden in the November presidential election.
While correlation does not imply causation, rising Democratic prospects of a win, as reflected in polls and betting markets, could help unwind the “Trump trade,” which appeared to reflect earlier expectations that Republicans would win and potentially take control of both houses of Congress in November.
“All else being equal, traders do associate Trump’s policies with a stronger dollar,” Weitzman said. “In our view, Trump is fundamentally viewed as more favorable to the dollar than a Democratic administration. This is because Trump’s core policies — tax cuts, immigration restrictions, tariffs — will be viewed as more inflationary and will therefore keep policy rates higher than they would otherwise be.”
Weitzman speculated that there are factors that may have helped Harris' campaign, including moving away from Biden's focus on Trump's threat to democracy and instead focusing on the former president's behavior, calling him a "wacko," which also drew attention to the 78-year-old candidate's age.
He said the approach seemed to resonate with undecided voters.
Additionally, Harris has attacked unpopular aspects of Trump's legislative record and supported allowing a policy that cut the corporate tax rate from 28% to 21% to expire, Weitzman said.
For now, the U.S. presidential race remains undecided, Weitzman said. "We continue to believe that the winner of the November U.S. presidential and congressional elections will largely determine whether the dollar strengthens or weakens. This is because the market's view (and our view) is that Trump's policies should lead to higher policy rates than Harris'," he wrote.
Article forwarded from: Jinshi Data
