What will the US election bring to the price of the US dollar and gold? Via Investing.com

Investing.com — As the Nov. 5 U.S. election approaches, financial markets are watching for any changes in economic policies that could affect the dollar and prices. If a party wins the presidential election, different scenarios may play out regarding these key assets.

“The US dollar has a dual character, meaning it is cyclical in nature while also being the largest safe haven currency,” an economist at ABN AMRO (AS:) Bank said in a note.

This duality means that during periods of strong economic growth – particularly when growth outpaces inflation, real interest rates are positive and fiscal and current account balances are improving – the dollar tends to recover.

However, during times of extreme market stress and liquidity shortages, the dollar’s role as a safe haven becomes paramount, increasing in value as investors seek stability.

A Democratic victory in the upcoming election, whether partial or outright, is expected to have limited impact on the US dollar. According to ABN AMRO Bank, under a democratic administration, inflation is likely to fall, but policy rates may fall even faster, leading to a reduction in real rates, which is usually negative for a currency.

Although a slight deterioration in the fiscal balance could put some downward pressure on the dollar, the overall impact is expected to be modest, resulting in a relatively stable dollar with only minor fluctuations.

Conversely, a Republican victory could lead to increased volatility for the US dollar. At first, the dollar may experience a rise, fueled by expectations of tighter trade policies, such as the introduction of tariffs, which could improve the trade balance.

The combination of rising inflation and faster interest rate increases compared to other nations would further support the dollar’s strength.

However, this initial increase is likely to be temporary. As the broader economic impacts of these policies become apparent, the dollar could see a long-term decline.

In a scenario where a Republican administration implements large-scale tariffs – a “Hard Trump” scenario – the resulting divergence between US and European monetary policies could be among the most pronounced since the euro was launched in 1999.

This scenario could lead to a depreciation of the euro against the dollar, potentially driving the exchange rate below parity.

However, as market sentiment stabilizes and the negative consequences of these policies begin to affect the economy, the dollar’s initial strength could reverse, leading to a phase of marked dollar weakness.

Returning to gold, this precious metal has traditionally been seen as a safe haven, especially during times of economic uncertainty.

However, the dynamics of the gold market have evolved in recent years, particularly with the rise of gold ETFs, which have made gold more of a speculative asset, heavily influenced by investment flows, movements in the US dollar and real interest rates , rather than just through its traditional role as a safe haven.

If the Democrats win, “we think gold prices could be very modestly supported as we expect a modest decline or a neutral dollar and some lower real yields. We expect the gold price to remain around $2,500 per ounce,” said an economist at ABN AMRO Bank.

Conversely, a Republican victory, especially one that leads to widespread tariffs, could create a more complicated scenario for gold.

In the early years of such an administration, rising inflation and rising interest rates could support the dollar, potentially driving gold prices below their 200-day moving average, possibly as low as $2,000 an ounce.

However, as the dollar’s initial strength fades and real interest rates fall, gold is likely to rebound, with prices potentially surpassing highs reached in early 2024.