Investing.com — Recent developments have reinforced the factors that underpinned the dollar’s strength over the past decade, but the upcoming U.S. election could significantly change that trajectory, Goldman Sachs strategists said.
Rates, which play a central role in currency markets, are expected to take center stage in several election scenarios, Goldman says.
The bank specifically points out that the dollar could respond most strongly to a Republican move, which could lead to bigger rate hikes and domestic tax cuts. In contrast, a divided Republican government is expected to cause a narrower and smaller dollar rally.
Meanwhile, a Democratic advance or a divided Democratic government “would likely result in an initial decline in the dollar as markets revalue the prospect of more dramatic rate changes,” strategists said.
They believe that currencies that are sensitive to China and policy changes, such as the Mexican peso (MXN), the Chinese yuan (CNH), the South Korean won (KRW), the euro (EUR) and the Australian dollar (AUD) , would experience some relief after the crisis. recent market movements.
The company’s research shows that under a base case of higher US tariffs on China with a Republican administration, the Chinese yuan could weaken to around 7.40, and the euro could fall by around 3%, or even up to 10% in the case of a global basic rate with associated tax reductions.
The outlook for the Japanese yen against the US dollar () is less clear due to competitive influences, making it a less preferred currency pair for Goldman Sachs in this context.
“Fundamental analyzes generally point to smaller exchange rate effects than event studies or policy-oriented analyses. Therefore, we believe that investors should be cautious with estimates based on the experiences of 2018-2019. And we believe markets will not fully reflect our rate expectations immediately,” the Goldman team said in a note.
“As a result, we prefer trade expressions with longer durations in Republican outcomes than Democratic trade expressions,” she added.
Goldman emphasizes that US policy is only one of the key factors driving the currency outlook.
The bank sees potential upside risks to their forecast of a gradual depreciation of the dollar from the 2022 peak, citing continued “American exceptionalism.” However, they also signal potential downside risks if China’s stimulus efforts have a larger-than-expected impact on rebalancing global growth.
