In the run-up to the upcoming US presidential election, uncertain times are looming for the global financial markets. Historically, close and controversial election results have led to increased volatility. This uncertainty not only affects the US dollar, but also has an impact on emerging market currencies, particularly the Brazilian real (BRL) and the Mexican peso (MXN).
Weakness in the Real and Peso – Liquidation of Carry Trades
The BRL and MXN were among the strongest currencies in the world in 2023. However, both currencies gave back most of their gains in 2024. This is due to the unwinding of carry trades, in which investors took advantage of high interest income in emerging markets to benefit from relatively high real interest rates.
The BRL in particular has weakened further recently. While the Japanese yen weakened again recently, the MXN and BRL were unable to benefit from this development. Nevertheless, both currencies are not at great risk in the longer term due to the positive trade and current account balances.
Astonishing Stability of the Indian Rupee
The Indian rupee (INR) has shown relative stability against the USD over the last five years. This development is remarkable in view of India’s impressive economic growth. However, the country is failing to address its structural trade and current account deficits, which continues to put pressure on the INR. Despite this weakness, the currency appears more stable than one would expect given the existing economic challenges.
Influence of the US Elections on Volatility
Since the turn of the millennium, US presidential elections have repeatedly been characterized by close and sometimes controversial results. These political uncertainties could also increase volatility on the financial markets this year. It seems paradoxical that economies that have stabilized in recent years are under pressure from a currency such as the USD, whose political system appears fragile. However, it explains the efforts of BRIC countries to become less dependent on the dominance and fluctuations of the USD.
These independence efforts should not be interpreted as a rejection of the West, but rather as an attempt to strengthen the country’s own resilience to external shocks. However, a clear development in the US election could lead to an appreciation of currencies such as the BRL and MXN, which have been under pressure in recent months.
Long-term perspective: Declining Influence of Western Election Results
A notable event this summer was the strength of Asian currencies in the context of a significant stock market correction. This could be a harbinger of a “new normal” where Western investment capital flows become less important and capital stock remains more concentrated within Asia. This would be a significant trend that could weaken the role of the USD and other Western currencies in the long term.
Europe has already shown signs of economic stagnation. The US, whose economic model is heavily based on fiscal deficits, could face even greater challenges. Massive trade and current account deficits, which have risen sharply recently, combined with political uncertainties could put pressure on the USD in the long term.
The upcoming elections could therefore not only cause short-term volatility, but also initiate long-term changes in the global economic and financial architecture. Emerging markets, particularly Asian economies, could benefit from this in the form of increased stability and stronger internal capital commitment.
