The upcoming U.S. presidential election is expected to be extremely close, with polls suggesting that both candidates have nearly equal chances of winning. How might the results impact the currency market? We believe that under a Harris presidency—regardless of the congressional election outcome—the dollar would weaken slightly. In contrast, a Trump victory could strengthen the dollar, while riskier currencies would likely weaken, and market volatility would increase.
Key Points:
– Polls suggest Harris and Trump have very similar chances of winning.
– Harris leads in swing states, and markets are split 50/50.
– Congress is expected to be divided, reversing the 2022 midterm results.
– Harris favors higher taxes and fiscal expansion.
– Trump proposes lower taxes and higher import tariffs.
– A Trump victory could be positive for the dollar but negative for emerging market currencies.
– Trump’s stance on the dollar adds uncertainty to the FX market outlook.
The somewhat surprising, yet likely inevitable, resignation of President Joe Biden in July has heightened uncertainty surrounding the election. Unlike Biden, who trailed Donald Trump in both national polls and swing state surveys, Kamala Harris now holds a slight lead heading into the November 5 vote. However, given the past inaccuracy of polls, particularly in the 2016 and 2020 elections, along with a high number of undecided voters, the outcome remains as unpredictable as a coin toss.
So far, financial markets have shown limited reaction to the political uncertainty. One-month implied volatility for EUR/USD has risen in anticipation of the vote, but only to mid-June highs and marginally above recent levels. We expect investors to price in more risk premiums as the election draws nearer, especially if the polls remain too close to call or if Trump’s campaign gains momentum. The impact of the election outcome on currencies, particularly if Trump wins and Republicans gain full control of government, remains unclear, and could lead to heightened market volatility as election day approaches.
Who is leading in the polls, and how might the election impact U.S. policy and currencies?
After the long-awaited September televised debate between the candidates—the first and only one—Harris appears to have gained a slight advantage. She currently holds a narrow lead in both national and state polls. In the RealClearPolitics national poll, Harris is favored by 49.1% of voters, while Trump holds 46.9%—a significant shift from the end of Biden’s campaign when Trump held a roughly 3 percentage point lead.
According to Pew Research Center, the state of the U.S. economy remains the most critical issue for registered voters (81% vs. 79% in 2020), followed by healthcare (65%), Supreme Court nominations (63%), foreign policy (62%), violent crime (61%), and immigration (61%). Harris appears to hold an advantage in healthcare, racial issues, and uniting the country, while Trump’s strength lies in economic, immigration, and foreign policy matters. One of the most significant weaknesses in Trump’s campaign seems to be the Republican stance on abortion.
The president, however, is not elected by popular vote, and there have been cases where the candidate with fewer votes won the electoral vote, as was the case with Trump’s 2016 victory. In the U.S. electoral system, each state is allocated a certain number of electoral votes based on its population, and in all but two states, the candidate with the most votes receives all the electoral votes. To win the presidency, a candidate needs to secure more than half the votes—at least 270.
The outcome in most states seems decided, with the election likely to hinge on several swing states, including Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin. According to recent polls, Harris holds a narrow lead—less than 2 percentage points—in four of these seven states. This aligns with a 270toWin poll, which shows Democrats leading in Michigan (58.3%), Nevada (60.8%), Pennsylvania (55.3%), and Wisconsin (57.3%), while Republicans are ahead in Arizona (58.9%), Georgia (58.3%), and North Carolina (59.3%).
The betting markets currently give Harris and Trump nearly equal odds of winning. PredictIt, one of our preferred political event barometers, puts the Democratic candidate slightly ahead (53% vs. 51%), a situation that has remained unchanged since late July. A similar model from Polymarket, however, gives Trump a slight advantage (52.8% vs. 46.4%). It’s worth noting that polls have historically underestimated Republican support, as seen in eight of the last eleven elections. Trump outperformed polls in both 2016 (+4.2 percentage points) and 2020 (+3.2 percentage points). Whether changes made by pollsters since then will correct these errors remains to be seen.
What are the policy implications of the election?
Kamala Harris (Democrats)
A Harris presidency would likely bring significant policy changes, particularly if her proposals pass through Congress. One of the most substantial changes for the markets would be tax increases. During her campaign, Harris proposed raising the corporate tax rate from 21% to 28% and increasing the capital gains tax from 20% to 28% (though this would still be much lower than Biden’s proposed 39.6%). Income taxes would remain largely unchanged, with a slight increase from 37% to 39.6% for the highest bracket, affecting Americans earning over $400,000 per year, who would also see higher healthcare contributions.
Fiscal policy under Harris would remain expansionary, with plans to increase investments in housing, education, and infrastructure. According to an analysis by the University of Pennsylvania’s Penn-Wharton Budget Model, these plans would increase spending by $2.3 trillion over the next decade, raising the primary deficit by $1.2 trillion (or $2 trillion if expected declines in economic activity are factored in). While this would not solve the U.S. debt problem, the model predicts a much larger $5.8 trillion increase in the deficit under Trump—excluding some of his latest proposals.
On foreign policy, Harris supports Biden’s stance on China and efforts to limit semiconductor exports to the country. Relations between the U.S. and the world’s second-largest economy are unlikely to change significantly, although Harris would adopt a less protectionist stance than Trump, with lower tariffs. She has also committed to continuing support for Ukraine “as long as necessary,” leaving no doubt about the U.S.’s commitment to NATO.
Donald Trump (Republicans)
A second Trump term would likely bring a return to many of the reforms he implemented after his 2016 victory. Domestically, Trump might attempt to extend his 2017 tax reform (the Tax Cuts and Jobs Act), which is set to expire in 2025, maintaining a corporate tax rate of 21%. He has also proposed expanding the child tax credit and eliminating taxes on Social Security contributions and tipped income, which would reduce tax revenues by about $10.5 billion—a move unlikely to pass even if Republicans control Congress.
We expect a return to the “America First” approach that characterized Trump’s first term. He reiterated his commitment to imposing a minimum 10% tariff on imports from most countries to promote U.S. manufacturing and increase tax revenues. However, these tariffs are not expected to offset revenue losses from extending domestic tax cuts. Trump also plans to end what he views as unfair trade practices by imposing at least a 60% tariff on Chinese goods. This could lead to uncertainty regarding U.S. membership in NATO, heightened security risks for Europe, and a shift of some industrial production across the Atlantic, posing risks to the European economy and the euro.
How might the election results affect the currency market?
So far, the financial markets’ response to the upcoming election has been relatively muted, but this will likely change as the vote approaches, especially if the polls continue to show a tight race. Markets dislike uncertainty, and the prospect of a coin toss between two candidates could lead to increased volatility and risk aversion—typically translating into a stronger dollar in currency markets. We will be closely monitoring implied volatility levels and risk reversals, which measure the difference in implied volatility between call and put options and serve as directional indicators.
Kamala Harris (Democrats)
This scenario would likely bring less uncertainty. It would largely represent a continuation of the current status quo in both domestic and foreign policy, with Harris pushing for higher taxes once Trump’s 2025 tax reforms expire. We believe the prospect of higher taxes would be slightly negative for the dollar, as investors anticipate weaker U.S. economic performance, lower inflation, and lower Federal Reserve interest rates compared to a Trump presidency. Markets would also likely price in reduced protectionism and stronger global growth, particularly in Asia, which could weigh on the dollar due to its status as a safe haven.
We expect emerging market currencies, particularly those in Asia closely tied to the Chinese economy (such as the South Korean won, Thai baht, and Malaysian ringgit), to appreciate slightly. European currencies would also likely benefit from reduced security concerns in Europe, as Harris has pledged to continue supporting Ukraine and NATO allies. Market volatility would be lower, given the avoidance of Trump’s unpredictable and chaotic leadership style.
Donald Trump (Republicans)
Trump’s focus on tax cuts could lead to increased disposable income and higher consumer spending in the short term. If Trump were able to push his proposals through Congress, U.S. economic growth could initially be stronger. However, higher consumer demand and a rapidly rising primary deficit would likely result in higher U.S. inflation, which would ultimately have negative consequences for medium-term growth. This situation could be exacerbated by his tariff plans, which would raise the prices of imported goods. Trump also plans to crack down on undocumented workers, and his proposal to deport 15–20 million migrants could pose a particular challenge for the agricultural sector.
At the same time, we believe a Trump victory would be positive for the dollar. While higher inflation in the U.S. could have medium-term growth consequences, we expect markets to react primarily by pricing in higher Federal Reserve interest rates. The increased risk of a global growth slowdown, driven by U.S. protectionism and geopolitical tensions, could also reduce risk appetite and boost safe-haven flows into the dollar.
We expect emerging market currencies, particularly in Asia, to experience sell-offs as investors brace for higher U.S. interest rates, increased protectionism, more volatile foreign policy, and weaker Chinese economic growth. We also believe European currencies would depreciate due to uncertainty over NATO, higher tariffs, and reshoring. Market volatility would undoubtedly be higher under a Trump presidency compared to Harris.
Does Trump favor a weaker dollar?
One of the biggest mysteries for the market is Trump’s stance on the U.S. dollar. Both Trump and his vice-presidential running mate, J.D. Vance, have previously advocated for a weaker dollar, arguing that a strong currency limits the competitiveness of U.S. companies globally. It is unclear whether devaluing the dollar is a priority for Trump— we suspect it is fairly low on the list, given that he has not spoken on the matter in recent months.
It is also unclear how Trump would implement such a policy, and we are highly skeptical of his chances of succeeding. Any attempt to weaken the dollar would undoubtedly have significant implications for the FX market and alter our views on the election’s impact, particularly if Trump tried to undermine the Federal Reserve’s independence by pressuring the central bank to cut interest rates or print more dollars.
Author: Matthew Ryan, CFA – Head of Market Analysis, Ebury
