Election-Violence Risk Threatens US Dollar Dominance

(Bloomberg) — The scenario of another contentious presidential race torn apart by violence looms as a priceless risk for investors who have long relied on the institutional integrity of the United States as the basis of the nation’s economic strength.

Having the world’s dominant currency has helped keep U.S. borrowing costs and prices of commodities from oil to iron low, while also giving it geopolitical power to drive American rivals out of the global financial system. What underpins the dollar’s dominance, say Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen and their predecessors: the rule of law and institutions that transcend individual politicians.

As the countdown to US election day continues, one of the fears of some investors is that this respect will wane. This comes at a time when there are doubts about whether former President Donald Trump will concede if he loses to Vice President Kamala Harris. Not only does Trump continue to insist that the 2020 election was stolen from him, he recently claimed that the 2021 transition was one of “love and peace” despite his supporters’ historic storming of the US Capitol. The riot resulted in death and destruction in the main building of the American legislature.

The big fear this time is that global investors will make a fundamental assessment of trust in US institutions. This is a reflection of the trillions of dollars that foreign governments, funds and individuals have poured into the $28 trillion U.S. Treasury market and the $61 trillion stock market, along with corporate bonds and others, in the context of the United States being the world’s largest net debtor. securities.

“If there is a real question about an effective and peaceful transfer of power, that could be extremely disruptive, not only to our investors, but also to the business community and economic activity here,” former Treasury Secretary Robert Rubin said on a Zoom call hosted by Business & Democracy. he said. My attempt is Wednesday. “The strength of the dollar depends on our economy, respect for the rule of law and, most importantly, the Fed maintaining its independence,” he said.

Thierry Wizman, a three-decade Wall Street veteran who began his career at the Federal Reserve Bank of New York, worries about a scenario in which uncertainty about the outcome extends to congressional approval in January.

“If traders lose confidence in U.S. institutions, the narrative of American exceptionalism may be over,” said Wizman, global currency and interest rate strategist at Macquarie. “The way that’s going to happen in the next few weeks is that we have an election where we don’t have a definitive outcome for a few weeks and people can’t trust the institutions to adjudicate any of these disputes.”

The elections also take place against a backdrop of broader concerns about the ability of the US dollar to maintain its dominance in the face of rival efforts to restrict its use. Earlier this month, leaders of Russia, China, India and other emerging markets held a summit highlighting efforts to develop an independent cross-border payment system.

Even some of America’s allies are wondering how to deal with an America where both political parties embrace protectionism and want to bring supply chains back home. The unpredictability of Trump’s second presidency could increase their concerns.

‘Black Eye’

Almost two-thirds of investment professionals surveyed by the CFA Institute worldwide expect the dollar to lose its reserve currency status to some degree within the next five to 15 years, according to a report released last week.

Pat Toomey, the top Republican on the Senate Banking Committee until his retirement from the Senate in January, emphasized his concerns in an interview this month.

Toomey said an event like the one on January 6, 2021 “could harm our ability to remain the world’s dominant reserve currency.” “This was a huge black eye in the reputation of the United States.”

A disorderly mob entered the US Capitol that day; He attacked Congress, which was meeting to confirm Joe Biden as the next president, and mob members chanted “Hang Mike Pence,” the then-vice president.

Trump’s denial

One reason for concerns about another unrest after this election is Trump’s refusal to acknowledge what happened last time.

“There was a peaceful transfer of power,” Trump said in an Oct. 15 interview with Bloomberg News Editor-in-Chief John Micklethwait at the Economic Club of Chicago. “It was love and peace.”

Violence has already become a feature of the 2024 elections; Trump has faced two assassination attempts in July, including one in which a bullet grazed his ear. Meanwhile, the courts have become complicated even before voting day. More than 165 lawsuits have been filed since 2023, according to a Bloomberg analysis, ranging from lawsuits over how votes are counted in Georgia to what types of ID voters can use in North Carolina.

More than half of those lawsuits were filed in the seven states where polls show the race between Harris and Trump is the closest.

Such a basis — and particularly the possibility of vote recounts at the state level — “opens a window for allegations of official misconduct and litigation to address it,” Macquarie’s Wizman wrote in a recent note.

Previous Wars

Of course, a clear and quick election result will eliminate this scenario next week. If Trump wins, investors will need to reflect on comments Trump has made in recent months pledging to maintain the dollar’s global role even as he preoccupies himself with tariff threats.

Following the 2020 election, financial markets were largely unaffected when Trump refused to accept the result. Going back to the 2000 election, when George W. Bush’s contest against Al Gore went to the Supreme Court and the outcome was delayed for more than a month, stocks tumbled during the legal battle – though this was in the midst of the US dot-com boom. The trend towards collapse and recession makes it difficult to eliminate any political influence.

But things may be different this time, as a new wave of violence and widespread rejection of the election results in the coming weeks could make the Jan. 6 incident seem less of an isolated incident.

Bank of New York Mellon Corp. “You can’t be uncomfortable” about confidence in the dollar and U.S. Treasuries, Chief Executive Robin Vince said in an interview with Bloomberg last week. “Like many tipping points, you don’t know exactly when you’re going to get close to it until you get to the other side.”

Vince said that “the credibility of the U.S. rule of law is certainly an important component of that trust”; This sentiment is shared by both current and former leading economic policymakers.

Current Fed chairman Powell is among many officials on US economic policy who have pointed out that America’s “great democratic institutions” and the rule of law underpin the dollar’s status. Currency dominance is “a very important thing for us,” he added at a hearing in the House of Representatives last year.

Yellen, Powell’s predecessor at the Fed and current Treasury chair, emphasized in an interview with Politico in September that a smooth transfer of power after the election is “really essential for us to have a democratic system” and is an element of having a strong fiscal structure. The system is “based on strong institutions and the rule of law.”

JPMorgan Chase & Co. Events that undermine “perceived stability,” including the “increasing polarization” of the U.S. administration, could erode the dollar’s status, analyst Alexander Wise wrote in a report laying out risks to the greenback earlier this month.

Hedging Strategies

Even for those who view the risks of dedollarization as modest, some long-term investors may be tempted to hedge against the risks, JPMorgan’s Wise and fellow analysts wrote in a recent comprehensive report on the dollar. One potential strategy could be to “strategically underweight US stocks.”

They emphasized that de-dollarization would especially “negatively affect large financial institutions.” The JPMorgan team wrote that US fixed-income securities would also be “adversely affected by the possible depreciation of the dollar” if their role in the world decreases.

“The potential for uncertainty — a highly contentious election that becomes more about personalities and ethics — could cause volatility in markets until an outcome is certain,” said Karen Manna, fixed income portfolio manager at Federated Hermes. Assets under management are $800 billion. The events of January 6 are “on everyone’s mind in the markets.”

–With assistance from Tania Chen, William Selway and Amanda Gordon.

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