The foreign exchange market could be one of the first areas of the financial system to react as election results roll in.
The U.S. dollar was little changed against other global currencies on Tuesday evening as voting began to wind down in the presidential election. Currencies are more regularly traded during the overnight hours in the U.S. than domestic stocks and bonds.
"Watching the dollar is going to be critical tonight. That will be the most liquid and the most transparent messaging to what we are getting markets to do, because that's where people can put money to work fast," said David Zervos, Jefferies chief market strategist on CNBC's " Traders generally expect that a strong night for former President Donald Trump and Republicans in Congress could push the greenback higher. Trump's proposals to hike tariffs against major U.S. trading partners would, in theory, result in a stronger dollar.
"Levies on trade should increase domestic business activity and reduce U.S. imports. We believe these effects should help more domestic-oriented small-cap companies and raise the U.S. dollar's exchange value," Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, said in a note to clients Tuesday.Still, market participants seem to be positioned for a scenario where Trump wins, said Chris Turner, global head of markets at ING.
"The bigger move in FX markets is going to be the dollar's downside if there's not a red sweep. And particularly if Kamala wins, I think that would be the biggest dollar down move," Turner said, referring to Democratic nominee and Vice President Kamala Harris. "I think the jury is out if Trump wins the presidency but it's a split Congress."
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