US President Donald Trump is an outspoken advocate of a weak dollar. This will improve the international competitiveness of domestic industries. In the run-up to the election, he is finally getting his way. However, the question is to what extent this is due to his opponent's plans. After all, Democratic candidate Joe Biden wants to invest about $ 7,000 billion more in the US economy. Much of that amount is earmarked for climate measures. He also wants to put a lot of money into improving infrastructure and the education system.
Wanted: $ 35,000 billion
The cost of the plan comes on top of the US government's usual spending. This year, the budget deficit is already over $ 3,000 billion. In large part, of course, this is due to the massive stimulus measures to keep the economy going despite Covid-19. But the last time a surplus emerged was 19 years ago. Biden wants to cover the higher spending through tax measures. Especially at the top end, the rate will go up substantially. But even in favourable scenarios, the national debt grows to over $ 35,000 billion by 2030. For the dollar, it is hoped that foreign investors such as China and Japan will keep faith in US public finances and continue to buy government bonds.
Trump vs. Biden
Of course, whether Biden can implement his plans depends largely on the election results. In recent months, he has taken a clear lead over Trump in most polls. Recent figures show that Biden has over 50 per cent of voters behind him, compared to just under 43 per cent for Trump. However, a lot can still happen. If a Covid-19 vaccine comes along at lightning speed and the US economy rebounds, things suddenly look a lot better for Trump. However, that scenario is not very likely. The development of one of the most promising vaccines has been delayed. Equally important is the growing political disagreement over extending Covid-19 benefits. If those are discontinued, some 30 million unemployed Americans will see their incomes drop significantly.
Please be patient.
It is far from certain that on 4 November we will already know who the next president will be. The number of Americans voting by mail is higher than ever due to Covid-19. Counting these votes takes extra time. Moreover, it would not be the first time that the differences are so small that some of the votes have to be recounted. In 2000, Democratic candidate Al Gore admitted his loss only after a month and a half. During that period of uncertainty and in the weeks that followed, the dollar fell almost 10 per cent against the euro. Some financial players are already hedging against a repeat performance. In derivatives markets, price swings for November and December contracts are already larger than usual. The currency world can get its teeth wet.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
