Does Politics Drive USD Performance?

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20210906 COTD x Does Politics Drive USD Performance - chart website

Source: Unigestion, Bloomberg, as of 31 December 2019

Many studies have been carried out over the years on how the USD reacts under different political administrations. Some argue that it tends to perform better during Republican administrations than Democrat ones as the latter tend to engage in less hawkish policies, although the economy tends to perform better. If we look at the performance of the Fed US trade-weighted dollar index since the early 1970s, we can see that the performance of the index is very mixed and inconclusive overall. More importantly, political risk tends to be more of a headwind for countries dependent on external funding and flows, which is usually the case for emerging markets. This year has been a good illustration of this: in Latin America, political risk has weighed heavily on the currencies of Peru, Colombia and Chile, either due to upcoming elections or market-unfriendly reforms.

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