(Bloomberg Opinion) — Strategists at JPMorgan Chase & Co. wrote this week about the odds narrowing on a Donald Trump win in the U.S. presidential election. His opponent, Joe Biden, is still comfortably ahead in the polls, but the bank’s commentary got me thinking about what impact the result might have on Europe’s markets, not least on the euro. What would four more years of Trump mean for the single currency, and would a Biden presidency mean anything different?
The dollar’s weakness has become a cause of angst for the European Central Bank, which doesn’t have an official mandate to manage the euro but always has the currency pretty high up in its thoughts. As I’ve written before, a stronger euro reflects in part Europe’s better performance — so far — in managing the pandemic. Having a robust currency isn’t always a bad sign. The problem for the euro zone is that its economy, and Germany’s in particular, is dominated by exports. A highly valued euro is potentially bad news for the region’s manufacturers.
Although the euro has fallen a little this week, after reaching about $1.20, it has still appreciated by 6% this year.
Now, Trump is no fan of a strong dollar. Indeed, the ECB’s comments this week on the dollar’s weakness has evoked some fears of a global currency war, as policy makers start to make minor verbal interventions on the FX markets to try to redress the balance. Nevertheless, the U.S. stock market has just had a stonking August and has hit all-time highs, so it’s tempting to assume that a Trump win would be a bigger positive for equities and the greenback. Plenty of investors have done well out of this presidency.
At the same time, a Biden administration with a leftish economic agenda would ordinarily be troubling to the financial markets. While there isn’t much policy detail to fret over yet, nor any clear sign of a Biden pick for Treasury Secretary, investors will be alive to the risk of a big-spending, tax-hiking Democrat government.
A progressive shift toward modern monetary theory could even spook market confidence globally, especially if there is pressure on the U.S. Federal Reserve to cross the Rubicon of monetary financing for government spending. All of this would appear to suggest that Biden might mean a weaker dollar than Trump.
However, this is to dismiss Trump’s own predilection for a weaker greenback to support America’s manufacturers. It also probably overestimates the market’s regard for the current occupant of the White House, and the political chaos that he sometimes inflicts on the world. A Biden “sanity premium,” where investors start to favor the dollar again, cannot be discounted. Equities have soared even with the Democratic challenger’s healthy poll lead.
There are bigger forces than the candidates at play here, too. The clear advantage that the U.S. has enjoyed over Europe for decades in terms of economic growth and higher interest rates has diminished. So it follows that the dollar premium may well reduce regardless of who’s president. It’s the monster stimulus from the Fed that’s the overwhelming factor driving currency markets. The world is awash in dollar liquidity; would anyone change that right now?
It’s also clear that (barring a few exceptions) Europe’s political leaders will far prefer the stability of a Biden regime to the diplomatic agonies of Trump, regardless of FX matters. About 15% of euro area exports head stateside, and an end to the recent spate of tariff disputes would be warmly welcomed. And even if the dollar stays low, the chances of a U.S.-euro zone currency war would be far lower with Biden in charge.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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