Citi strategists on Thursday reiterated their view that the US election is “positive for the US dollar” while acknowledging other factors that could have an impact in the coming months, such as Federal Reserve policy, recession risk and global economic conditions .
According to Citi, trade and tariff policies are expected to be the main drivers of the bullish outlook for the USD ahead of the elections. Specifically, the potential for higher tariffs, especially those targeting China, is seen as a key factor that could strengthen the dollar.
Strategists highlighted that currencies such as the Chinese yuan (), euro (), Mexican peso (), Taiwan dollar () and Thai baht () are considered particularly vulnerable to these risks.
However, the macroeconomic landscape remains uncertain and other catalysts may become more influential.
Citi outlines several election scenarios, with different implications for the dollar. A ‘red wave’ scenario, in which Trump wins and Republicans gain control of both chambers of Congress, is seen as the most positive for the USD. In this case, Citi expects a focus on improving the trade deficit through tariffs and possibly some fiscal expansion through further tax cuts and deregulation.
“We therefore consider this a consistent market premium for a red wave. However, we view the 5% as a ceiling on how much the USD could rise on election risk alone, given other factors currently impacting the dollar,” Citi’s note said.
The report also notes that market participants typically begin trading election themes two to three months before the event, with the US presidential debates in September providing a key point for markets to more seriously assess election results.
Strategists expect that any USD strength related to the election will likely be priced in well before November, with the dollar possibly peaking around that time.
“This suggests that the election will be a ‘sell the news’ event for the USD and for volatility,” they add.
They also point out that other factors will remain important for the dollar in the coming months. Federal Reserve policy, particularly interest rate movements, and broader macroeconomic conditions, including the likelihood of a US recession, will impact the dollar in addition to election risks.
In addition, global economic developments, such as the slowdown in manufacturing and economic challenges in Europe and China, may also have an impact.
