Trump-Biden contest: US dollar rebound indicates investors expect a disputed election outcome

Futures contracts are pricing in an unusually high level of anxiety in the months after the November 3 election, suggesting traders are worried about the possibility of a constitutional crisis

While the dollar had declined over the summer, its recent rebound also reflects a reassessment of optimism about a global economic recovery

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US President Donald Trump (left) and his Democratic challenger in the presidential election Joe Biden are seen on a computer screen, during their first debate on September 29. Photo: Xinhua

Published: 4:48pm, 1 Oct 2020Updated: 7:11am, 17 Oct 2020

Bearish bets on the US dollar have increased sharply since the beginning of this year. As the dollar index, a measure of the greenback against a basket of its peers, plunged more than 10 per cent between late March and the end of August, short positions against the currency rose to their highest level since the end of 2017, data from Bloomberg shows.

Some of the arguments in favour of a weaker dollar remain compelling. The most persuasive one is the unprecedented measures taken by the Federal Reserve in response to the damage wrought by Covid-19. By slashing interest rates close to zero, expanding its balance sheet dramatically and setting up a range of credit facilities to shore up the financial system, the Fed has stripped the dollar of most of its yield advantage over its peers and fuelled concerns about currency debasement.

The greenback looked particularly vulnerable during the summer, when a resurgence of Covid-19 cases in several large US states forced governments to roll back plans to reopen their economies, threatening America’s fragile recovery. A highly unpredictable presidential election was, at the time, perceived by many traders as an additional reason to be bearish on the dollar.

Yet, as election day draws near, the risks related to the outcome of the vote – an event which historically has rarely acted as a catalyst for a major sell-off – are coming under intense scrutiny. This is happening at a time when volatility in many asset classes is increasing, exacerbated by a second wave of the virus in Europe, which, according to survey data, has caused the rebound in economic activity to falter.

Since the end of August, the dollar index has risen 1.8 per cent, its strongest rally since early April. While it is too soon to say whether this marks the start of a sustained appreciation, the traditional role of the world’s dominant reserve currency as a refuge in times of turmoil is beginning to reassert itself.

An employee of a bank walks near the screens showing the Korea Composite Stock Price Index (left) and the foreign exchange rate between US dollar and South Korean won at the foreign exchange dealing room in Seoul on September 28. Photo: AP

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