Is a Trump Presidency a good or bad thing for the U.S. dollar? Well It depends on how far you are looking.
Eight months ago, most of us laughed at the idea that Donald Trump could become the next United States President. With having no political experience under his belt, few Americans thought he would actually get this far. But fast forward to June 2016, and he’s all but certain to secure the Republican nomination and be the official GOP candidate at their July convention.
At this stage, it is not only possible, but maybe even probable, that he will become the 45th President of the United States. Hillary Clinton has a reasonable chance of winning, but it is going to be a tight race.
Theoretically, Republican policies are friendlier for U.S. corporations, stocks and the U.S. dollar…but history tells us something very different.
According to S&P Capital, IQ which ran the numbers going back to 1945, Democrats are actually better for the economy, stocks and the U.S. dollar.
Stocks have appreciated an average of 9.7% under a Democratic President and only 6.7% under a Republican President. The U.S. economy has grown 83% of the years when the Democrats were in office, compared to 74.4% Republican years. Of course, some of the under performance can be attributed to the fortuitous timing on behalf of the Democrats who inherited markets after big dips. The Republicans do have some hope though, since stocks perform particularly well when there is a Republican Congress and a Republican President.
For the U.S. dollar, we only have data going back to the 1970’s covering 10 election cycles–but the results are consistent. According to the following chart, the greenback historically performs better under Democratic (blue bars) versus Republican (red bars) leadership.
On a short term basis, the market may not care about who wins, and this is because the dollar tends to have a positive bias during election years but in the long run, the impact of a Republican vs. Democrat victory could be more significant.
However, the U.S dollar may be hit particularly hard if Donald Trump becomes President, on a short and long-term basis, mostly because of his protectionism policies. One of his policies that scares investors the most, is his opposition to the current free trade agreements. He feels that NAFTA, China’s currency manipulation, import dumping, export barriers are unfair for the average American and business.
He wants to protect jobs and local economies, which is admirable in theory, but could come at the expense of the U.S. dollar. The U.S. economy relies heavily on foreign investments. But if we have a President telling the world that their money is not welcomed, they will most likely choose to invest elsewhere.
By alienating the world, Trump risks turning investors away from U.S. Treasuries. There won’t be a massive exodus exactly overnight, but foreign investors will certainly have less desire to buy. As we know, the market hates uncertainty and the lack of clarity on Trump’s economic policies could translate into immediate weakness for the U.S dollar. Hilary Clinton has her faults, but history is on her side; and she may not only be better for U.S. stocks, but also for the U.S. dollar.
Until next time,
Ms. Kathy Lien is the Managing Director and Founding Partner of BKForex’s strategies and creator of the new course The ULTIMATE Forex Trading Course produced in conjunction with Weiss Educational Services.Kathy, a leading currency and Forex expert, started the #1 Forex news site DailyFX.com, is a regular contributor to CNBC Squawk Box and is a former host of CNBC’s Forex show, Money in Motion. She is also an internationally-published author of the best-selling book, “Day Trading and Swing Trading the Currency Market” (now in its third edition) and “The Little Book of Currency Trading.”