Investing.com — As the Nov. 5 U.S. election approaches, financial markets are keenly attuned to any shifts in economic policy that could impact the dollar and prices. If one party wins the presidential election, different scenarios are likely to arise regarding these key assets.
“The US dollar has a dual nature, meaning it is cyclical in nature, while at the same time being the ultimate safe-haven currency,” an economist at ABN AMRO (AS:) Bank said in a note.
This duality means that during times of strong economic growth – especially when growth exceeds inflation, real interest rates are positive, and budget balances and current accounts are improving – the dollar tends to recover.
However, in periods of extreme market stress and liquidity shortages, the dollar’s role as a safe haven becomes crucial, causing its value to rise as investors seek stability.
A Democratic victory in the upcoming elections, in whole or in part, is expected to have a limited impact on the US dollar. According to ABN AMRO Bank, inflation is likely to decline under a democratic government, but policy rates could fall even faster, leading to a reduction in real interest rates, which are typically negative for a currency.
While a slight deterioration in the budget balance could put some downward pressure on the dollar, the overall impact is expected to be modest, resulting in a relatively stable dollar with only minor fluctuations.
In contrast, a Republican victory could lead to greater volatility for the US dollar. Initially, the dollar could see a boost, fueled by expectations of tougher trade policies, such as the introduction of tariffs, that could improve the trade balance.
The combination of rising inflation and faster interest rate increases compared to other countries would further support the dollar’s strength.
However, this initial increase is likely to be temporary. As the broader economic consequences of these policies become clear, the dollar could fall longer term.
In a scenario in which a Republican administration implements widespread tariffs – a “Hard Trump” scenario – the resulting divergence between US and European monetary policies could be among the most pronounced since the introduction of the euro in 1999.
This scenario could result in a depreciation of the euro against the dollar, potentially pushing the exchange rate below parity.
However, as market sentiment stabilizes and the negative consequences of these policies begin to impact the economy, the dollar’s initial strength may reverse, leading to a phase of pronounced dollar weakness.
As for gold, this precious metal is traditionally seen as a safe haven, especially in times of economic uncertainty.
However, the dynamics of the gold market have evolved in recent years, especially with the rise of gold ETFs, which have turned gold into more of a speculative asset, heavily influenced by investment flows, movements of the US dollar and real interest rates, rather than just through its traditional role as a safe haven.
If the Democrats win, “we think gold prices could receive very modest support as we expect a modest decline in the dollar or a neutral dollar and some lower real yields. We expect gold prices to remain around $2,500 per ounce,” said an economist at ABN AMRO Bank.
Conversely, a Republican victory, especially one that leads to the implementation of widespread tariffs, could create a more complicated scenario for gold.
In the early years of such an administration, rising inflation and rising interest rates could strengthen the dollar, potentially pushing gold prices below the 200-day moving average, possibly to $2,000 an ounce.
However, as the dollar’s initial strength fades and real interest rates decline, gold is likely to recover, with prices possibly exceeding the highs seen earlier in 2024.
