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The upcoming US election a non-event but could be great for the dollar: BofAML

Justina Crabtree; special to
Markets underpricing US election risks: BAML

While the market is currently considering very little uncertainty into the upcoming U.S. presidential election, both Hillary Clinton and Donald Trump are likely to raise the value of the dollar, according to one analyst.

David Woo, head of global rates, FX and EM FI strategy at Bank of America Merrill Lynch, told CNBC that the "market is not even thinking about this U.S. election." But, he added that if any opinions were to be discerned, the "market has already decided Trump is going to lose (the debate) tonight."

Woo pointed out that "if you look at interest rate volatility, it has never been this low," which was ironic as he considered the current presidential race to be the "most interesting 30 years."

According to Woo, the market is expecting a Clinton victory alongside a split Congress. He explained that this would equal "four more years of gridlock" and "continued policy paralysis." "This is the reason why the market is thinking that this (election) is going to be a non-event," Woo argued.

However, Woo warned that "the U.S. could be one shock away from the next recession," and this would mean that the U.S. Federal Reserve "is going to have no choice but to basically keep rates lower for longer."

Woo also argued that if "Trump were to win, the dollar would do extremely well." A "Republican clean sweep" would result in a "massive loosening of fiscal policy," with the new president doing whatever was needed to revive U.S. economic growth.

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In fact, Woo predicted that even if Trump were to implement just half of his proposed economic policies, this would result in the "biggest fiscal stimulus in U.S. post-war history outside of recession."

This would put pressure on the Fed to normalize interest rates, resulting in a stronger dollar.

A Clinton presidency "would probably also see a stronger dollar and higher rates," according to Woo. The Democratic candidate, like her Republican counterpart, would implement fiscal stimulus, though this would be checked by taxing the rich to fund infrastructure spending.

"Any dollar rally would be shallower as a result," Woo conceded.

But, both outcomes of the U.S. election have the potential to negatively impact the world economy. Trump's fiscal easing in particular, with its knock-on effect of pushing both the dollar and rates higher, "would not be good for emerging markets," Woo said.

In addition, while a Trump clean sweep would likely benefit the domestic economy, his isolationist stance would "probably not be good for anybody else, emerging or developed, for that matter."

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