Recently, there has been a noticeable strengthening of the US currency on the foreign exchange market. There are two reasons for this rally. First is the investors caution about the outcome of the presidential election in the United States and the second is a COVID-19 pandemic.
There was a detailed explanation of these main factors’ essence and their influence on world markets’ dynamics in general and foreign exchange in particular. Therefore, now I will remind you of these factors and how they affect the markets.
The influence of the presidential election outcome is based on uncertainty about who will win Donald Trump or Joe Biden and how the losing side will behave and mostly whether acts of defiance will start or not. It is no secret that both Biden and Trump supporters express great determination to resist if their candidate does not win, causing not only street riots but also a military confrontation with the risk of escalating into a civil war. In any case, this probability is taken into account by many authoritative political experts. Of course, in such conditions, investors are very cautious and reduce their presence in risky assets, buying the dollar as a safe-haven currency.
The second reason is the impact of coronavirus pandemic. The beginning of the second wave this fall has already caused a partial closure of European countries’ economies. France and Germany have already taken these measures, and Great Britain has joined them today. These countries’ economies continue to suffer from low economic activity, which will further decrease due to the resumption of quarantine measures, which will constrain its growth.
What to expect soon
I believe that today these two factors will continue to support the US currency rate, putting pressure on the demand for risky assets, primarily company shares. Such dynamics may last at least until November 4, when the first presidential election results will become known.