If Democratic candidate Hillary Clinton wins the 2016 presidential election, her policy platform could have a notable impact on the U.S. dollar. Her fiscal and trade policies are two areas in particular that could affect the world's reserve currency.
These policies could impact the dollar in complex ways, because how the currency responds to economic conditions and market sentiment is intricate. For example, developments that improve faith in U.S. business conditions make global market participants more likely to push the greenback higher.
However, negative economic developments can also provide tailwinds to the dollar, because many perceive it as being both the world's reserve currency and a safe-haven asset. No one knows for certain exactly how a specific policy will impact a currency until after that policy is implemented. Amid this situation, several market observers have speculated on how Clinton's policies could impact the world's reserve currency.
Her proposed fiscal policy platform could impact the dollar through changes to government spending and the tax code. Her platform would focus on matters including enhanced infrastructure spending and significant changes to the tax code. Her plan to invest US$275 billion into infrastructure could potentially help jumpstart the nation's economic conditions, which could provide a boon to the greenback.
Her plan would increase tax revenue, which could in turn provide tailwinds to the dollar over the long-term by helping to reduce the impact of the national deficit on investment.
However, some have expressed concerns that her fiscal policies would reduce economic growth by sharply increasing taxes on wealthy Americans. By undermining the wealth creation of individuals in this income strata, these policies could potentially depress investment and consumer spending, thereby providing headwinds to the currency.
Democratic Party Positions
The Democratic Party's 2016 presidential platform contains liberal fiscal policies that would lower the national budget deficit, provide greater tax relief to many low- and middle-income Americans and also fund a wide range of social programs.
Should Clinton's platform succeed in improving the economic situation of the middle-class, it could provide support for the dollar by bolstering the market's faith in the nation's economy. By putting more money in people's pockets, her policies could potentially bolster personal consumption, which historically accounts for roughly 70% of U.S. gross domestic product (GDP).
While Clinton's plan aims to reduce the deficit, the Democratic Party has at times had a reputation for being generous in terms of its expenditure. If she failed to bring down the deficit, it could crowd out private investment, hinder economic growth and therefore undermine the dollar.
Clinton's platform would increase taxes for wealthy Americans and provide tax relief to working-class families by both increasing the size of the child tax credit and applying it to a broader range of families.(Retrieved 20 October 2016 http://www.philly.com/philly/news/politics/presidential/Analysis-What-Clinton-Trump-tax-proposals-would-mean-for-you.html)) She proposes doubling the child tax credit from US$1,000 to US$2,000 per child aged 4 and under and also extending the credit to an estimated 14 million Americans by changing who can access the credit.
Her platform would put more money in middle-class pockets by developing new tax credits for those who care for a parent or grandparent in addition to credits that cover out-of-pocket health care expenses.(Retrieved 20 October 2016 http://www.philly.com/philly/news/politics/presidential/Analysis-What-Clinton-Trump-tax-proposals-would-mean-for-you.html))
Clinton has vowed to oppose any trade deal that would not prove beneficial to the American people.(Retrieved 21 October 2016 http://www.businessinsider.com/hillary-clinton-economy-economic-plan-trade-taxes-regulation-2016-10)) Over the last several years, the nation has had a steady history of suffering a steadily widening trade deficit.(Retrieved 21 October 2016 http://www.huffingtonpost.com/kevin-l-kearns/bill-clintons-trade-legac_b_8945180.html) If she can help prevent this deficit from growing larger or even lower it somewhat, this development could provide support for the dollar.
Her platform on trade has shifted somewhat in the several months between the announcement of her candidacy and the election. While she originally supported the Trans-Pacific Partnership (TPP), even referring to it as a the "gold standard,"(Retrieved 21 October 2016 http://www.wsj.com/articles/hillary-clinton-comes-out-against-trans-pacific-partnership-trade-deal-1444249761)) she later changed her position, announcing in October 2015 that she opposed the trade deal.
This reversal seems to be part of a broader shift in her point of view, from being an advocate of free trade toward being more hesitant about deals that support this free flow of goods and services between countries.(Retrieved 21 October 2016 http://www.businessinsider.com/hillary-clinton-economy-economic-plan-trade-taxes-regulation-2016-10))
During a speech she gave in Michigan during August 2016, she stated: "My message to every worker in Michigan and across America is this: I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership."(Retrieved 21 October 2016 http://www.businessinsider.com/hillary-clinton-economy-economic-plan-trade-taxes-regulation-2016-10))
Political observers should keep in mind that some groups always benefit at the expense of others as a result of globalisation. A large number of U.S. jobs have moved overseas, but the elimination of trade barriers has also resulted in foreign companies investing in the United States and creating new positions.
The trend of offshoring, or in this case moving U.S. jobs to other nations, has decelerated, and foreign companies have been creating U.S. jobs in the 2010s.(Retrieved 21 October 2016 hhttp://www.newyorker.com/business/currency/why-donald-trump-is-wrong-about-manufacturing-jobs-and-china)) Many of these jobs have come from China, because Asia's largest economy has little capacity left to add such positions. After U.S. manufacturing hit an all-time low of 11.45 million positions in March 2010, the industry added close to 1 million jobs by March 2016. A significant number of these jobs were created in Southern states such as Tennessee, North Carolina and South Carolina.
In contrast, open manufacturing positions in China have declined since 2012, falling 6% by March 2016, according to figures supplied by Quanton Data.(Retrieved 21 October 2016 hhttp://www.newyorker.com/business/currency/why-donald-trump-is-wrong-about-manufacturing-jobs-and-china))
Some Republican lawmakers have criticised the Federal Reserve's (Fed) use of monetary policy in the years following the Financial Crisis, but the financial institution has not drawn the same response from Democrats. After the global economy suffered serious challenges between 2007 and 2009, the Fed quickly moved to cut interest rates sharply.
It also engaged in several asset-purchase programs that resulted in the organisation's balance sheet increasing to more than US$4 trillion. Both these asset purchases and the policy of cutting benchmark rates to very low levels have been considered bearish for the dollar.
The Fed has ceased all asset-purchase programs and announced a single hike in benchmark rates. Should the central bank keep increasing these rates, it will place upward pressure on broader interest rates, a move that should prove bullish for the dollar.
Although the Fed operates as an independent entity that is designed to be exempt from partisan politics, lawmakers appoint its members. Should the central bank require another appointee during a Clinton presidency, she would likely nominate someone who is liberal and therefore dovish on inflation. The Republican lawmakers who have criticised the Fed's interest rate policy over the last several years have been hawkish on inflation.
Clinton's plan increases taxes for the wealthy and alters the tax treatment of global corporations. Her policies would increase tax revenue by an estimated US$1.1 trillion over the next 10 years.
An analysis of her economic plan conducted by Wharton's School of Business stated that her proposals would decrease economic growth in the short-term and increase it in the long-term. Her tax policies would have a similar impact on job creation, according to this analysis. Clinton's plan could result in 282,000 lost jobs by 2018, but it might create 645,000 new jobs by 2027 and two million more positions by 2040.
If her plans do have this positive impact on the U.S. economy, it could place upward pressure on the dollar by giving global market participants greater faith in the nation's economy. On the other hand, strengthening business conditions could have a depressing effect on the currency because many view it as a safe-haven asset.
Clinton has provided a laundry list of policy proposals on her website that would cost more than US$1.8 trillion over the course of a decade, according to estimates provided by the Committee for a Responsible Federal Budget (CRFB).. They include:
- increasing infrastructure spending,
- expanding the Affordable Care Act, and
- investing in energy and research.
The CRFB predicted that Clinton's proposals would pay for US$1.6 trillion worth of this expenditure through tax increases, primarily ones affecting wealthy individuals. In addition, her platform could add US$275 billion worth of tax revenue from companies, though the organisation's analysis emphasized that she needs to provide greater detail on this specific plan.
If Clinton succeeded in bringing the federal government's budget under control, the CRFB estimated that the national debt would still increase over the next 10 years, from 74% of GDP at the end of 2015 to 86% by 2026. At the time of report, this ratio was sitting at a record high outside of times around World War II.
One major consequence is that whoever ascends to the Oval Office in January 2017 will inherit a country that pays out hundreds of billions every year in interest. The U.S. federal government will spend an estimated US$300 billion in interest payments in 2017 alone, according to predictions offered in a Brookings Institution paper.
Clinton and Republican hopeful Donald Trump weighed in on their budget proposals during the third and final debate in October 2016. Moderator Chris Wallace asked the candidates about their plans and noted that under CRFB estimates, the ratio of U.S. debt to GDP would rise to 105% over the next decade, while under Clinton, that figure would increase to 86%. Clinton asserted that her proposals would "not add a penny to the debt," while Trump promised that he would "create tremendous jobs."
Regardless of whether these candidates can pay for their proposals through job creation or tax reform, interest payments will cause the nation's debt to increase by US$9 trillion over the next decade.
Clinton's policies may be more centrist than the broader Democratic Party, because there is evidence supporting the notion the party has grown more liberal in recent decades. Figures provided by the Pew Research Center reveal that while 30% of Democrats described themselves as liberal in 1994, this percentage increased almost 100% by 2014.
Over the years, the Democratic Party has undergone significant demographic shifts, its members becoming better educated and more racially diverse. These days, many Democrats are more likely to be open to socialism and less likely to agree that capitalism is the best economic model available.
Because of these changes, some members of this party are less likely to compromise with Republicans. This development could prove problematic, because more than 80 Democrats lost their Congressional seats during President Barack Obama's terms.
Several market experts have weighed in on how the outcome of the election could impact the dollar. David Zervos, chief market strategist for investment bank Jefferies LLC, predicted that both a Clinton and a Trump presidency would place downward pressure on the dollar, with a Clinton victory having a lesser impact.
"If the U.S. moves away from free trade agreements, as Trump has suggested, returns on capital will fall," Zervos wrote. "Domestic labor may gain but the gains shouldn't exceed the losses for capital income, and if the losses to capital income are large enough, even labor may lose. Lower returns on capital should lower real rates and lower the dollar, just as we saw with the GBP following the Brexit vote."
He provided a different assessment of a Clinton win, stating that her victory would "usher in a minor pivot toward higher trade barriers," which he predicted would also be bearish for the dollar, but not as much as Trump's plan.
Not everyone provided the same assessment. David Kohl, head of foreign-exchange research for Swiss private bank Julius Baer, predicted that the dollar would fare well regardless of who wins the election.
"Buy the dollar because no matter who wins, in the run up to the election, it's so tight," Kohl said. "You have rising uncertainty and this is good for the U.S. dollar."
If Clinton wins the presidential election, her policy platform could help push the dollar higher relative to other currencies. Her policies could potentially place upward pressure on the dollar by improving the nation's economic conditions, which would attract foreign capital and potentially provide tailwinds to other countries around the world.
However, improving U.S. economic conditions could also make global market participants less risk-averse, therefore providing less motivation to invest in the dollar as a safe-haven asset.
The dollar could easily push higher if the Fed decides to hike benchmark interest rates, but the nation could have a hard time doing this at a reasonable pace seeing as how the world's largest economy is facing sluggish economic growth. As a result, the Fed would need to engage in any tightening of monetary policy slowly.
Ultimately, the impact of a Clinton victory could hinge largely on the makeup of the House of Representatives and Senate following the 2016 election. If the Democrats gain control of the Senate and/or House, it could be far easier to enact the policies in her platform. However, a notable Republican presence in Congress could shift the scales in favour of the federal government lowering spending, which may slow the growth of the national debt and provide tailwinds to the dollar.
This article contains general information and does not represent trading advice.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…