No election in the world gets as much media coverage and hype as the one in the US. Every four years, the world comes to a standstill while waiting on the outcome because the US is the world’s largest economy and most significant military power. This means almost every country has an interdependent relationship with the US. But, do investors overrate the effects of US elections on the dollar and economy?
What Does The Historical Data Suggest?
America’s democracy is far from perfect, but the country has maintained its electoral timetable throughout its history, so there are decades of data to analyze when researching this topic. While the US elections affect the economy and currency, they don’t impact them as much as people predict or expect. During the build-up to the election and after the announcement of preliminary results, there’s a short-term change in the value of the currency and stock, and that is about the extent of its impact.
Forex trading is a tool used by many to protect their assets from election-based uncertainties. There might be an initial change in the market especially if there’s an unexpected result on election night, but elections are less impactful in the medium and long term.
Market Sentiments and Initial Uncertainty
Market sentiments are more unpredictable, but there’s a general pattern to how this plays out. Although not always the case, Republican victories usually result in incredible gains in the hours and days following the election, while Democrat wins lead to short-term stagnation and contractions. When it became apparent that Trump was on the verge of winning, market activity increased dramatically. Reuters recorded a four-month surge in the dollar rate on the 6th of November, following President Trump’s victory, and while the US’s political activities increased in dollar trades, counterparts like the euro tumbled.
Dramatic market movements like this often subside after a few days; that’s why it’s necessary for traders to remain calm and stick with their strategies. The best thing to do on election night is to stay away from your “trading gadgets” so you do not get influenced to make long-term decisions on short-term market data. No matter how unpredictable it might seem, remember that this isn’t the first election; the market will eventually normalize
Policy Proposal Impacts on the Economy
When a new president is elected alongside a reshuffled Congress, policy direction changes are expected. This is especially true when the President-Elect is from a different party. Policy proposals often matter more when the new President’s party also controls the Senate and House. Unsurprisingly, Trump’s proposed policies are radical when compared to the reality of the current government. These policies will definitely have adverse impacts on the US dollar and the economy at large.
The most significant policy proposal involves increasing tariffs on Chinese goods. Tariff increment was a significant talking point during the election cycle but now it seems like it might be a reality when considering the percentage of Republicans in the House and Senate. The Republican party gained four seats during the 2024 general election, totaling 53 spots in the Senate, while the Democrats lost 4, holding 47 seats. In the house, Republicans hold 220 and Democrats hold 212 positions. Time will tell whether another trade war will occur between the US and China over the next four years.
External Reactions to US Elections
Most countries and financial markets prepare for the US elections. The world has four years until the next election, so allies and adversaries alike prepare for every possible scenario. The last thing the Shanghai or London Stock Exchange wants is to be caught unaware by rapid changes following the results announcement. The reaction of other countries to US elections is a never-ending cycle that ensures that these co-dependent parties are in the best possible position before, during, and after electoral cycles.
There will always be sudden market movements during the hours following an election, especially if the results are unexpected. Still, most countries are prepared and ready to react to results in ways that benefit them. The major issue is frantic trading by retail forex traders who get scared or overconfident by what they hear on the news or see on social media.
Election Cycle Forex Trading Tips
US presidential elections are almost certain to occur every four years; that’s why you need to incorporate the right strategies to ensure that you make the most of your time in the market. Filter out unnecessary information and choose the people and organizations you trust, and then can make or break your forex trading strategy during elections. Trade currency pairs and financial instruments you’re familiar with; don’t make rash, poorly calculated decisions based only on what you read or see on TV.
Beyond the Election
The US has grown to the point where one party controlling the presidency and legislature doesn’t matter as much as it used to. It’s highly unlikely that a president could significantly tank this currency or make it grow incredibly. Elections will always come and go — play your cards right and protect yourself during periods of uncertainty.
