How US Elections Could Impact Dollar Strength: Goldman Sachs - Invesco DB USD Index Bullish Fund ETF (ARCA:UUP)

As the 2024 U.S. presidential election approaches, financial markets are bracing for its potential impact on the U.S. dollar.

Past elections have triggered periods of dollar depreciation. This time, Michael Cahill, foreign exchange strategist at Goldman Sachs, explains the risks now point toward continued dollar strength in most scenarios, whether the election outcome favors Vice President Kamala Harris or Ex-President Donald Trump.

Republican Sweep

Cahill explains that a Republican sweep provides “the widest potential for broad tariff changes."

Goldman Sachs’ China economics team estimates that a 60% tariff on all U.S. imports of Chinese goods, for example, would raise about $250 billion in revenue. They also estimate that a “10% across-the-board tariff, in addition to higher tariffs on China,” could widen rate differentials between the United States and Europe, leading to an 8-10% depreciation of the euro against the dollar.

According to Cahill, those higher tariffs — especially on Chinese goods — could shift the terms of trade in favor of the dollar, driving it higher. Higher tariffs would raise the cost of imports, cut demand for foreign goods and potentially benefit domestic producers who raise prices.

The expert added that "the Republican platform has proposed using revenue from a baseline tariff to cut domestic taxes," which would they say will stimulate domestic spending and support the dollar.

Economists generally disagree. Higher U.S. tariffs, they say, may reduce demand for foreign goods, but they also hurt U.S. consumers by raising living costs by about 3 to 4%. This disproportionately affects middle- and lower-income families and does not boost American manufacturing or reduce the trade deficit. It could also harm the economy by increasing global poverty and creating market fragmentation

And If Trump Wins But Congress Is Divided?

A scenario where Trump wins with a split Congress could still lead to dollar strength, albeit to a lesser degree, according to Goldman Sachs’ Cahill.

Some tariffs could be raised by executive action alone, but a lack of unified Congressional support might limit the scope of policy changes.

Cahill expects “a narrower, smaller Dollar rally in response to a divided Republican government outcome.

How Would A Harris Victory Impact the Dollar?

If Harris wins the election, Cahill predicts this “would result in some initial Dollar downside.” Markets will likely adjust to the prospect of looser trade policies and potential tariff reductions.

Such a scenario would hold in both a Democratic sweep or divided Democratic government, according to Cahill.

However, the expert highlights that any major dollar weakness could be short-lived as markets would quickly refocus on broader economic conditions, including U.S. growth differentials with the rest of the world, which still favor the dollar.

Could Global Growth Challenge The Dollar?

While U.S. election outcomes are crucial, global growth prospects could counterbalance the dollar's strength. Cahill points out that stronger-than-expected growth in China or Europe could drive investment away from U.S. assets, putting downward pressure on the dollar.

This occurred in 2017 and 2021, when global growth optimism led to dollar depreciation despite U.S. elections.

Tariffs are one of the key channels through which political outcomes will affect currency markets. Historical examples of tariffs show that the dollar strengthened by about 0.7% against the Chinese yuan for each $10 billion in implied tariff revenue.

A Stronger For Longer Greenback?

Bottom line, Goldman Sachs forecasts that the risks favor continued dollar strength, especially under a Republican-led government.

“With mounting evidence that ‘US exceptionalism’ is still very much intact, we still think the risks are in favor of the Dollar being stronger for longer,” Cahill wrote.

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