Elections and the U.S. dollar

In the weeks leading up to the recent U.S. presidential election, the question on everyone’s mind (besides the outcome) has been how the event might affect the financial markets. Although most of the attention has been on the election’s impact on the stock market, analysts are also focused on the fate of the U.S. dollar, which is again approaching the eight-year lows hit earlier this year.

Discussions about how this election may influence the U.S. dollar are limited by the infrequency of presidential elections, making it difficult to draw solid conclusions. Also, fundamental analysis (e.g. the implications of economic policy) can tell you more about the dollar’s longer-term trends than its
daily (or weekly) movement surrounding an election.

To find out how elections — presidential and congressional — typically affect the U.S. dollar and whether the event could knock the dollar out of its slump and induce a rally in the next three months, we studied the moves of the Federal Reserve’s U.S. Dollar Major Currencies Index in the 60 trading
days before and after each election from 1973 to 2003.

While this period is relatively short for studying an annual event, it represents an important era in the U.S. dollar’s history. In March 1973, the United States and other major world governments decided to let their currencies trade freely against each other, a policy which scrapped nearly 30 years of fixed currency rates under the prior Bretton Woods Agreement. We also compared the behavior of the Fed’s U.S. dollar index to the New York Board of Trade’s U.S. dollar index futures contract (DX), which was
launched on Nov. 20, 1985, by the New York Cotton Exchange. While the Fed’s major-currency index acts as a proxy for the dollar’s strength, the NYBOT’s dollar index futures can be traded, so its historical performance adds perspective to this analysis.

Overall, the U.S. dollar tended to start sinking three months prior to an election and then rise modestly in the three weeks leading up to the event. This rally typically continued for a month following election day. The dollar posted its largest average gains after presidential elections compared to mid-term congressional elections.