- The US dollar is likely to be the first asset to signal what markets think the election result will be.
- Strong liquidity and global 24-hour trading activity make the dollar a reliable indicator.
- A Trump win could boost the dollar while a Harris win could lead to the greenback weakening.
The US dollar might be the most important asset to watch for a potential read on the US election results as the votes are tallied this week.
Jefferies chief investment strategist David Zervos said that the US dollar will be the first asset to telegraph the likely winner as markets digest the implications of a Donald Trump or Kamala Harris presidency.
In an interview with CNBC, Zervos said the dollar “will be the most liquid and the most transparent messaging to what we are getting markets to do because that’s where people could put money to work fast.”
He highlighted that the US dollar is traded 24/7 with massive liquidity from trading parties around the world. Therefore, as election results roll in during the late hours of Tuesday night and into Wednesday morning, the dollar will likely be the first asset class to move on the results.
The dollar is seen as rising under a potential Trump presidency, as his tariff proposals would likely raise interest rates, which in turn would lead to a stronger dollar.
On the flip side, a falling US dollar would likely suggest that a Kamala Harris victory is reflected in the election results because interest rates are seen as more likely to continue falling under a Harris administration, putting downward pressure on the dollar.
As for how to get a read on who markets think will win, the US dollar index will be a strong gauge of how traders are digesting the early election results.
The index measures the dollar against a basket of other major currencies and has rallied over the past month as former President Donald Trump gained momentum in the polls and in betting markets.
Beyond the dollar index, Zervos said it would be important to watch moves in the dollar relative to the Chinese renminbi.
"Dollar-China has been a big trade because people saw that as a real Trump winning trade, meaning he's going to go hard on China," Zervos said. "That's got a lot of crowded positioning in it. I'd be watching dollar-China very closely overnight," Zervos said.
Zervos expects a relief rally in risk assets as uncertainty surrounding the election begins to fade, assuming the results are decisive and known relatively soon.
"I think people really want to see smoothness here, then we can just see risk assets do better, we could see credit do better. We could see the panicky trades that people might have put on get pulled off," Zervos said.
Ultimately, Zervos said he'll change his stock and bond investments based on the dollar's reaction to the election results.
"We watch the dollar, that's our first indication of where the repositioning is taking place and then we can feed that back into bonds and stocks and different sectors," Zervos said.