The Market Is Already in the Biden Era... Dollar Weakness Likely to Continue

Effect of $2 Trillion Green New Deal Promise Upon Election
Fed's Low Interest Rate Policy Also a Factor in Dollar Weakness

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] As the US dollar, a safe-haven asset, continues to suffer from persistent weakness ahead of the US presidential election, interpretations are emerging that this may be in anticipation of the post-election period. Although the prospects for an agreement on the stimulus bill remain uncertain, the market views large-scale support after the election as inevitable.

This atmosphere is evident in the market’s complete indifference to talks that the stimulus negotiations between the White House and the Democratic Party might be postponed until after the election. The Wall Street Journal (WSJ) reported on the 21st (local time) that "signals are emerging that the White House and House Speaker Nancy Pelosi will pass a COVID-19 relief package after the election."

Speaker Pelosi and Treasury Secretary Steven Mnuchin, who are leading the negotiations, spoke again on the phone that day and agreed to continue talks the following day, but Pelosi expressed in an interview with MSNBC that "while hopeful for an agreement, it will be difficult to reach one before Election Day."

Despite the negative outlook for a stimulus agreement, the continued decline in the dollar and US Treasury prices can be seen as reflecting expectations for the post-election period. In particular, since Democratic presidential candidate Joe Biden has mentioned implementing a $2 trillion Green New Deal policy if elected, the market’s heavier weighting toward his victory can also be inferred.

The US Federal Reserve’s decision to keep the benchmark interest rate at zero for an extended period is also driving down the dollar’s value. Alex Mert, head of the Merck Hard Currency Fund, predicted, "With the Fed signaling it will maintain the benchmark rate at zero for a long time, if the US economy shows signs of recovery, the real interest rate in the US will fall faster than in other countries, leading to a decline in currency value."

The decline in the dollar’s value is also affecting gold prices and oil prices. Gold and oil move in tandem with the dollar. When the dollar weakens, gold and oil prices rise. On this day, the international gold price for December delivery closed up 0.7% ($14.10) at $1,929.50 per ounce.

The WSJ noted that the 10-year Treasury yield surpassed 0.8% that day and reported that the 'Blue Wave,' where the Democrats control the presidency as well as both the Senate and the House, has fueled the rise in Treasury yields.

Wall Street is already leaning toward the Blue Wave scenario. Investment bank Goldman Sachs recently advised clients in a memo that "there is a possibility the Democrats will control the White House and both chambers of Congress in this election," and recommended preparing accordingly. Goldman Sachs projected that if President Trump is re-elected and the Republicans maintain the Senate majority, the stimulus package would be less than $1 trillion.

However, CNN reported that Wall Street remains cautious about potential variables that could arise on election day. CNN noted that Wall Street has not forgotten the lesson from 2016 when, despite a sharp drop in futures markets following President Trump’s election, the stock market showed a strong rally shortly after opening.