With the United States counting down to Joe Biden’s inauguration as President, what are the likely fortunes for the dollar? Will the dollar rise now that most of the dust has settled on the Presidential elections? Or will it be devalued to jump-start the economy?
Unless there’s a major upset in the courts, it seems inevitable that Joe Biden will get sworn in on January 20, 2021.
Quite what the final makeup of the two houses of government will be has yet to be finalized. But the markets – always adverse to uncertainty – have already largely concluded Joe Biden will be heading up a divided government. They are now teasing out the implications for the financial markets and the likely impact on the direction of the dollar.
Though navigating the choppy waters of the House and Congress looks daunting, the Biden administration will still be able to push through much of their policy priorities via Executive Order. This route may become prevalent at a time when the ideological gaps between Democrats and Republicans have never been greater. Add a global pandemic and a faltering economy into the mix, and Joe Biden will have to dig deep to create bipartisan agreement.
However, Executive Orders can implement policy in an array of policy areas, including trade policy, regulatory policy, energy reforms, and immigration. All are keystones for a Biden administration, with broad implications for the health of the dollar.
So too will be Biden’s more outward-looking and global approach to politics. A stark contrast to the isolationist, American nativism touted by Donald Trump for the past four years.
Where is the smart money?
Economic powerhouse J.P. Morgan says a meaningful stimulus package agreed early next year would be enough to see growth in the second quarter of 2021. A divided government could well alleviate some of the fears regarding aggressive taxation and regulation.
Despite recent turbulence for the dollar, the overall outlook is a weaker dollar under a Biden White House. But this is playing against a backdrop of a split control government where the outcome is usually greater levels of policy uncertainty.
In the months ahead, all eyes will be on the Fed, and what moves it makes in the dynamic and fluid landscape post-Trump. The predicted outcome is a modest rise in long term rates.
Another major factor with the 45th President in the rearview mirror is US-China relations. With the Presidential election over bar the shouting, it is expected a Biden White House will act swiftly to reset the tenor and tone of trade negotiations with Beijing.
Where there has been a convergence between Trump and Biden is over the strength of the dollar. Both have frequently promoted the idea of a weaker, not rising price for the dollar. Much of their economic planning has centered around devaluing the dollar to boost exports and encourage domestic manufacturing and production.
While both men agree the way to do this is by bumping up the federal deficit, they are at odds over how taxation and central government expenditure. Trump’s headline-grabbing tariffs on China and others curbed US imports and generated extra revenue for the government. But it was at the expense of US consumers and small businesses in the form of additional taxation.
Biden promises to champion middle-class America’s interests through stimulus packages, infrastructure, renewable energy, and education. With neither Republicans nor Democrats inclined to cut government spending, the implications for the US dollar will continue much as before.
President-elect Biden and the Democrats have widely signaled their intentions to weaken the dollar. The new White House administration’s spending plans aim to revive small businesses and help citizens recover from the economic crash caused by COVID-19.
In many ways, the Biden stimulus plans are a blueprint of 2009 under the Obama White House. The focus will be on helping Americans back into work, debt prevention, and urging big businesses to assist their workforce and the local communities where they operate.
If Biden’s measures are as successful as the American Recovery and Reinvestment Act of 2009, within four years, millions of jobs will be created, consumer confidence will return to levels close to pre-COVID-19, and children will receive a better education.
The outcome of these measures will spur the broader American economy. As a natural consequence of these government expenditure inputs, the dollar will weaken while also improving the American middle-class’s living standards. Joe Biden’s firm focus on renewable energy, infrastructure, and education will ultimately do more to weaken the dollar than Trump’s saber-rattling trade wars.
As well as J.P. Morgan, strategists at Citi Private Bank are also predicting a weaker dollar in the days ahead. They are basing this chiefly on Biden being perceived as a steadier hand on the helm of international trade policy. Indeed, this was borne out by the dollar’s value dropping when it became increasingly clear that Joe Biden had won the race to the White House. Conversely, Asian currencies grew stronger.
Citi Private Bank is confident the dollar won’t rise given that a Joe Biden-led administration will herald a return to more conventional trade negotiations and foreign policy. It is expected Biden will expend a lot of energy rebuilding shattered international relations and restoring alliances. They say that the end of tariff threats will do much to benefit the world’s financial markets, particularly emerging markets.
Others are not so certain about the US dollar’s direction of travel. Some, like the OCBC Bank, believe the downward trend is beginning to slow.
A Biden administration will bring about clarity to international trade that’s been lacking over the past four years. The economic policies he will set in train are tried and tested. They will weaken the dollar if the past is any indication. At the moment, all we can do is count off the days and wait for Democrat Joe Biden to get behind the desk in the Oval Office. Maybe then we will get a crystal clear picture of whether the dollar will rise. Or fall as is expected.