Capital Ideas^TM

The results of the US presidential elections in November are set to have wide-ranging implications on the US dollar and emerging market (EM) exchange rates. In this piece, we examine what the outcome of the election could mean for EM currencies, through the impact on tariffs, sanctions, US fiscal policy, unorthodox economic policies and immigration.

Trade policy is likely to be the main factor through which the elections will impact EM exchange rates. Former president and Republican nominee Donald Trump has consistently pledged to implement tariffs as a central element of his trade strategy, particularly targeting China. During Trump’s first term, the average tariff on US imports from China increased from 4% to 17%, which, according to a 2020 WTO report¹, resulted in a significant decrease in trade between the US and China and caused substantial trade diversion to other regions.

While democrat nominee Kamala Harris also appears to lean towards some protectionist trade policies, she may be more targeted in her approach, focusing on electric vehicles (EVs) from China, for example, in an effort to protect US renewable energy.

Overall, there is uncertainty about the election outcome, the policy mix of the new US administration and the impact those policies will have on EM. In the case of a stronger dollar, we would likely see weaker EM currencies across the board, although there are some that are more sensitive to dollar strength. These include countries with significant goods imports, especially those with large trade deficits such as Senegal and Kenya. There are also currencies more sensitive to risk appetite and global growth expectations, including commodity currencies like the South African rand, the Brazilian real and the Colombian peso.

Certain currencies are influenced by specific policies. Tariff concerns would notably impact China, while Mexico, Trinidad, and Costa Rica are the most reliant on exports to the US. A significant increase in US tariffs would likely impact global supply chains, making exposure to global trade just as important as exposure to the US. Korea, Taiwan and Mexico are notable for their high revenue exposure to the US, with their economies heavily dependent on Chinese inputs. Mexico is also vulnerable to how US policy may change on immigration issues. Any negative effects on remittances would harm growth, the current account, and thus the currency.

In terms of safe havens within EM, India and Brazil might be less vulnerable. These economies are relatively insulated with a lower sensitivity to the dollar. India and Brazil are also key geopolitical allies of the US and are less likely to face increased tariffs. 

1. As at 19 March 2020. Source: World Trade Organisation. An economic analysis of the US-China trade conflict.