Citigroup Inc.’s currency strategists are standing behind their call that the US dollar will rally into the presidential election - even as the currency heads toward its steepest monthly drop since December. 

The bank’s foreign-exchange strategy team on Thursday highlighted the potential for the greenback to rally against a basket of emerging and developed market currencies - from the euro to the Chinese yuan and Mexican peso - as traders factor in the potential fallout of a victory by Donald Trump in the November vote. 

The impacts of the election have so far been overshadowed by anticipation that the Federal Reserve will start cutting interest rates next month, which has given investors incentive to shift cash out of the US as bond yields come down.

In China, a tariff shock could push policymakers to tolerate more yuan weakness to offset the hit to the economy, the strategists said. In Europe, US protectionist policies could jolt German manufacturing, drive disinflation and affect trade with China. 

“Markets are forward looking, and we expect any USD strength on the back of the election will be priced in well before the event, and we may see the high in the USD into November,” Tobon and his team said.  

Earlier this summer there was a flurry of interest in the so-called “Trump Trade” - in which traders positioned for higher bond yields and a stronger dollar on the view that a second Trump administration would prove inflationary. But it has waned in recent weeks as Vice President Kamala Harris shook up the race and erased Trump’s advantage in opinion polls. 

A Bloomberg gauge of the dollar has meanwhile fallen some 1.7% in August, on pace for its worst month this year, as traders braced for the Fed’s pivot. And the Citi strategists cautioned that the economy could play the dominant role in shaping the dollar’s direction.

“The dovish pivot from the Fed has actually been weighing on the USD recently, directly opposed to our stronger USD view on elections,” the Citi strategists wrote. “How the US economy continues to develop - and what that means for Fed pricing - will be potentially more important than the election if the repricing remains aggressive.” 

  - Bloomberg