World Economy

Top Banks Say USD Vulnerable

Top Banks Say USD Vulnerable Top Banks Say USD Vulnerable

Traders wanting to know what November’s US presidential election will mean for the dollar need look no further than the UK.

The pound plunged to a seven-year low and volatility soared, exceeding all other Group-of-10 nations, on risks created by a referendum on European Union membership. Given the tough talk on dollar strength from candidates vying for the White House, the greenback is just as vulnerable to politics, according to Deutsche Bank AG, JPMorgan Chase & Co. and Standard Bank Group Ltd, Bloomberg reported.

Republicans and Democrats have each accused China of purposely weakening its currency to gain a trade advantage, reflecting voter unease linked to a 14% slide in manufacturing jobs during the past decade. As rhetoric becomes action, countries that have sought more competitive exchange rates will be in the firing line, spurring foreign-exchange volatility, Deutsche Bank’s Alan Ruskin wrote in a May 6 note. China, Japan and Germany were placed on a currency manipulator watch list by the Treasury Department last month.

“Given that there is an anti-globalization, anti-free trade strain that’s running through the American electorate, the strong dollar is going to be a potential victim,” said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees about $236 billion. “The markets will start to price in a risk premium for the US dollar and for US financial markets.”

  Brexit Precedent

Upadhyaya, who holds a degree in economics and international relations and worked at Putnam Investments LLC in the mid-1990s when the US was embroiled in a battle with Japan about cheap vehicle imports, sees the dollar weakening versus the euro, yen and sterling.

JPMorgan’s John Normand, head of foreign exchange, commodities and international rates research, said investors should favor the euro and yen, should any trade conflicts emerge post election.

Steven Barrow at Standard Bank warns of a “pre-vote wobble” for the dollar—reminiscent of the pound’s response to Brexit—and a 20% slide for the greenback within months if Donald Trump were to win the White House.

The sudden realization that politics left the pound exposed came in February when British politicians settled on June 23 for a long-discussed referendum on exiting the world’s largest single market. Sterling volatility jumped by the most since 1998 on March 23, precisely three months before the vote.

The dollar’s day of reckoning may come as early as July, when the Republican and Democratic parties hold conventions to formally select candidates.