According to new research from Imperial College Business School, the value of the US dollar against foreign currencies between 1983-2024 increased, on average, by over 4 per cent a year during Democratic Presidencies and depreciated by 1.25 per cent a year during Republican Presidencies – a difference in returns of more than 5 per cent.

After documenting this correlation, the researchers believe they know what about those Presidencies that affected the currency’s value so significantly.

In their research paper, Presidential Cycles and Exchange Rates, Dr Pasquale Della Corte, Professor of Finance at Imperial College Business School, alongside Hsuan Fu, an Associate Professor in the Department of Finance, Insurance and Real Estate at Université Laval, explain that the key factor driving this polarisation was the approach to international trade taken by the different parties.

The paper is published on SSRN, where early-stage research papers, or ‘pre-prints’, are available under open access before they are reviewed by academic peers.

The researchers studied an array of foreign currencies, including those in developed and emerging economies across multiple continents, in exchange for the US dollar. They looked for factors that could account for this correlation, such as changes in economic conditions such as interest and inflation rate differences, as well as political shifts in other markets that could explain a change in the value of the dollar.

They found that changes in interest and inflation rates between the US and other countries did not have an observable relationship with time, meaning this did not explain the differences, and that political cycles in other markets also had a negligible impact on how overseas currencies were valued against the dollar.

Close scientific analysis points to differing Democratic and Republican trade policies accounted for shifts in the value of the dollar.

According to Professor Della Corte, when America’s trade policies impose restrictions on imported goods, foreign markets retaliate by imposing their restrictions on trade with the US. This leads to a decline in the value of the dollar.

“Policies favouring international trade, which are typically associated with Democrats, may led to an increase in demand for US dollars to pay for those goods and services. Republicans tend to favour trade policies that are more protectionist, and our research shows this goes hand in hand with a decline in dollar demand in other countries.” said Professor Della Corte.

Looking ahead to the upcoming 2024 Presidential Election, the researchers stress that what seems to influence the exchange rate is different policies, rather than the colour of the political party.'

“Over the 40-year period from October 1983 to January 2024, there was a difference in average annual exchange rate returns of more than five per cent between Democratic and Republican presidents – a statistically significant divide,” said Professor Della Corte.

“In theory, however, a Republican president who takes a position in favour of international trade agreements could see a rise in US dollar values, while a Democratic president who takes a less favourable position could see a depreciation, breaking the historical chain.”