The "strange" decline of the US dollar in August may be related to this!

A Wall Street strategist believes that the recent decline in the US dollar against other major currencies is somewhat "peculiar," suspecting that it may be due to a sudden shift in the US presidential election situation.

Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie, stated in a report on Tuesday: "In our view, the softening of the US dollar since early August is somewhat strange, as during this period, US data (retail sales, initial jobless claims, service sector ISM) have shown the economy to be relatively strong, despite concerns about an economic recession spreading at the end of July and early August."

However, he wrote: "We believe that the increasing prospects of the Democratic Party winning the presidential election may be the reason for the weakness of the US dollar since late July."

Wizman believes that "this is because Trump's policy proposals, including expanding tariffs and immigration restrictions, are seen as potentially more inflationary than those proposed by Harris." "In turn, this would mean that the Federal Reserve would need to maintain higher interest rates than before to support the currency."

The US dollar index, which measures the dollar against a basket of six major currencies, has fallen by 2.4% since August, nearing its low point in early January.

The sharp unwinding of yen interest rate trades at the beginning of this month also helps explain the weakness of the dollar, with the dollar falling by 2.6% against the yen so far this month. However, the weakness of the dollar is more widespread, with the euro rising by 2.5% against the dollar in August, the pound rising by 1.2% against the dollar, and the Australian dollar and New Zealand dollar also rising against the dollar.

Wizman pointed out that as the dollar fell in August, opinion polls also began to show that the competition between Republican candidate Trump and Vice President Harris in the November presidential election would be more intense than with President Biden.

While correlation does not imply causation, "the rise in prospects of a Democratic victory (reflected in polls and betting markets) may help unwind the 'Trump trade'," which seems to reflect earlier expectations of a Republican victory and possibly taking control of both houses of Congress in November.

Wizman said, "Under otherwise identical conditions, traders do indeed link Trump's policies to a stronger dollar. Fundamentally, Trump is seen as more favorable to a stronger dollar than a Democratic government. This is because Trump's core policies - tax cuts, immigration restrictions, tariffs - are seen as more likely to trigger inflation, thereby keeping policy rates higher than otherwise."

Wizman speculated that there are factors that may have helped Harris's campaign, including no longer focusing on Trump's threat to democracy like Biden did, but instead focusing on the former president's behavior, calling him a "weirdo," which has also drawn attention to the 78-year-old candidate's age.

He said that this approach seems to resonate with undecided voters.

Furthermore, Harris has also criticized the unpopular aspects of Trump's legislative record and supported the policy to allow the expiration of lowering the corporate tax rate from 28% to 21% Weizman said that, for now, the U.S. presidential election is still undecided. He wrote: "We still believe that the winner of the November U.S. presidential and congressional elections will largely determine whether the dollar strengthens or weakens. This is because the market's view (and ours) is that, compared to Harris, Trump's policies should lead to higher policy rates."