Investing.com -- The upcoming U.S. election is set to take the dollar on a wild run, economists at Wells Fargo said, but its eventual path is higher as foreign central bank are likely to accelerate the pace of rate cuts to shore up economic growth.
Wells Fargo (NYSE:WFC) said it now sees more long-term U.S. dollar strength than previously owing to "faster foreign central bank easing and underwhelming sentiment toward China," which should weigh on G10 and emerging market currencies in 2025 and into 2026.
While the dollar is expected to weaken in the near term, particularly against G10 currencies, this trend is likely to reverse in the second half of 2025 as the Fed's rate-cutting pace slows, while foreign central banks are likely to continue to ease.
"Faster easing from G10 central banks should weigh on foreign currencies, while over the medium term, stronger U.S growth and a slowing and eventual end to Fed easing should also support greenback gain," the economists said.
The need for speed on rate cuts in G10 and emerging economies is expected put most emerging market currencies on the back foot next year. This would pale in comparison with the backdrop for the Fed amid strong U.S. growth and underwhelming economic performance from China.
Currencies sensitive to China, meanwhile, particularly "high beta" currencies such as euro and New Zealand dollar, are expected to underperform as China's economic woes are likely to continue next year.
Over the short-term, a potential Donald Trump victory in the upcoming Nov.5 U.S. presidential election, "regardless of the congressional mix, we would become more positive on the U.S. dollar," the economics said. While a Harris victory would likely lead to a "relief rally that is supportive of foreign currencies and results in temporary dollar depreciation."
While the U.S. presidential election "remains a close call and the post-election policy outlook uncertain, trade and fiscal policy will be in focus regardless of which candidate wins the White House," they added.