For investors who have long seen the integrity of the US system as the foundation of the national economic strength, the prospect of another controversial presidential election full of violent conflict is an unpriced risk.

Having the world's leading currency helps lower America's borrowing costs and the prices of commodities from oil to iron, while granting the US geopolitical power to exclude competitors and control the global financial system. According to Fed Chair Powell, US Treasury Secretary Yellen, and their predecessors, the factors supporting the dollar's dominance are: the rule of law and institutions that transcend the influence of individual politicians.

As the US election countdown continues, one of the imminent concerns for some investors is the deterioration of this factor. People are skeptical whether former President Trump would be willing to concede if he loses to Vice President Harris. Trump not only continues to claim that the outcome of the 2020 election was stolen, but he recently stated that the 2021 transition of power was all about 'love and peace,' despite his supporters historically attacking the US Capitol building.

The biggest concern this time is the fundamental reassessment of global investors' confidence in US institutions. Against the backdrop of the US becoming the world's largest net debtor, foreign governments, funds, and individuals have invested trillions of dollars in the US' $28 trillion bond market, $61 trillion stock market, corporate bonds, and other securities.

Former Treasury Secretary Robert Rubin said on a Zoom call for the Business and Democracy Initiative on Wednesday, 'If there is really a problem with a peaceful transfer of power, that would be very disturbing—not only for our investors, but also for the business and economic activity here.' He added, 'The strength of the dollar depends on the respect for our economy and the rule of law, and importantly on the Federal Reserve's ability to maintain independence.'

Thierry Wizman, a seasoned professional with a thirty-year career on Wall Street that began at the New York Fed, is concerned that the uncertainty regarding the election results may continue until the congressional certification in January next year.

The Macquarie global currency and interest rate strategist said, 'If traders lose confidence in US institutions, the narrative of American exceptionalism may come to an end. What could happen in the coming weeks is that if there is no clear outcome in the election within weeks, people may not believe these institutions will adjudicate on these disputes.'

Another background of this election is that people are generally concerned about whether the dollar can maintain its dominant position as US competitors are actively trying to reduce the use of the dollar. Earlier this month, leaders from Russia, India, and other emerging markets held a summit to further develop an independent cross-border payment system.

Even some US allies are considering how to deal with a US where both parties advocate protectionism and want to bring supply chains back home. The unpredictability of a potential re-election of President Trump may magnify their concerns.

Another violent incident would become a stain on the reputation of the United States.

A report released last week by the Chartered Financial Analyst Institute (CFA Institute) in the United States showed that nearly two-thirds of global investment professionals surveyed expect the dollar to lose its reserve currency status to some extent in the next 5 to 15 years.

Pat Toomey, a senior Republican member of the Senate Banking Committee, retired from the Senate in January this year, expressed his concerns in an interview earlier this month.

Toomey said that another violent incident like January 6, 2021, erupting again "may impair the ability of the dollar to remain the world's major reserve currency", "this would be a significant blow to the reputation of the United States."

On that day, a chaotic crowd stormed the US Capitol as Congress was meeting to confirm Joe Biden as the next president. The rioters chanted "Hang Mike Pence", the incumbent Vice President.

Trump denies any connection to the Capitol riot four years ago.

One reason people fear a recurrence of unrest after this election is Trump's refusal to acknowledge the events of the past.

On October 15th, Trump, speaking to John Micklethwait, the Editor-in-Chief of Bloomberg News, at the Economic Club of Chicago, said: "The transfer of power is peaceful", "That's love and peace."

Violence has become a feature of the 2024 election. Trump has faced two assassination attempts, one as recent as July when a bullet grazed his ear. Meanwhile, the courts have already been involved even before Election Day. According to Bloomberg's analysis, there have been over 165 election-related lawsuits since 2023—ranging from courtroom cases in Georgia about how votes are counted, to issues about which identification voters in North Carolina can use.

More than half of these cases have been filed in the seven most fiercely contested states between Harris and Trump, as indicated by the polls.

In a recent report, Weitzman of Macgregor wrote that such groundwork, especially the possibility of state-level recounts, "opens the door to charges of officials abdicating responsibility and lawsuits."

Doubts about American democracy will erode the dominance of the US dollar.

It is certain that a clear and quick election result will eliminate this risk next week. If Trump wins, investors also need to carefully consider his remarks in recent months, including the commitment to maintain the global dominance of the dollar even if he threatens tariffs.

After the 2020 election, when Trump refused to accept the results, the financial markets were basically unaffected. Looking back at the 2000 election, the competition between George W. Bush and Al Gore was taken to the Supreme Court, delaying the outcome by more than a month. During this legal battle, the stock market experienced a decline - although it was during the bursting of the U.S. internet bubble and on the eve of an economic recession, making it difficult to infer any political impact.

However, this time the situation may be different, partly due to a new round of violence in the coming weeks and widespread denials of the election results, which may make the January 6 U.S. Capitol riot not look like an isolated incident.

Bank of New York Mellon CEO Robin Vince said in an interview with Bloomberg last week that regarding confidence in the dollar and U.S. bonds, "you can't be complacent," "like many critical points, when you get close to it you don’t know until you have crossed to the other side," he said.

Vince said, "the reliability of the American rule of law is undoubtedly an important part of this confidence" - both current and former prominent economic policymakers hold this view.

Many officials responsible for U.S. economic policy have pointed out that the "great democratic system" and rule of law support the dollar's position, with current Fed Chairman Powell being one of them. He also added during a House hearing last year that the dominance of the dollar is "very important to us".

Former and current Secretary of the Treasury Janet Yellen emphasized in a September interview with Politico that the smooth transfer of power after the election is "very important for our democratic system" and is also a key element of a strong financial system based on powerful institutions and the rule of law.

JPMorgan analyst Alexander Wise pointed out the risks facing the US dollar in a report earlier this month, stating that events disrupting "stability", including increased polarization in US governance, could weaken the dollar's position.

Hedging Strategies

JPMorgan's Wise and other analysts wrote in a recent comprehensive report on the dollar that even some long-term investors who may not see significant risks in de-dollarization might lean towards hedging risks. One potential strategy is "strategically reducing exposure to US stocks".

They emphasized that de-dollarization "is likely to have adverse effects on large financial institutions". If the dollar's global position declines, US fixed-income securities will also be "adversely affected by potential dollar depreciation".

Karen Manna, portfolio manager of the Federated Hermes fixed-income investment portfolio, managing over $800 billion in assets, stated that "potential uncertainties - a highly controversial election, more related to personality and morality - could trigger market volatility until the results become clear. Memories of the January 6th US Capitol riot still linger in everyone's mind."

Editor/Rocky