How the Dollar would react to a Democrat or Republican Election victory? The United States will hold the Presidential election next Tiesday November 6th and despite Barack Obama is favorite to have four more years, the Republican candidate, Mitt Romney still has his options.
It is difficult to say how the election of each candidate would impact the dollar, but FXstreet.com has asked worldwide experts to chare their thoughts on this exciting even. "The US elections are likely to have a significant impact on currencies in the short and long terms," comments Yohay Elam from ForexCrunch. Enjoy his article:
US Elections and the Dollar
By Yohay Elam, Forex Crunch
The US elections are likely to have a significant impact on currencies in the short and long terms. Some of the lower volatility seen recently can be attributed these elections. The publication of the result is expected to trigger choppy trading in the immediate term and higher volatility in the days to come.
With fears of a worse slowdown all over the world and with too many European issues left unresolved, the expected impact will likely be a “risk on / risk off” effect – where a more favorable result will lift stocks and risk currencies while weighing on the US dollar and Japanese yen, while a less favorable result will hurt stocks and boost the safe haven greenback and JPY.
Fiscal Cliff Ahead
The biggest issue on the agenda is the so called fiscal cliff. If no decision is taken, tax hikes and spending cuts will come into effect and will undoubtedly make significant damage to the US economy. It is clear that politicians will eventually find a last minute solution.
A more favorable result means a better and faster solution, while a less favorable result will mean a last minute drama and an unconvincing compromise that could lead to more credit rating downgrades.
What is a favorable result?
The best outcome for the US economy is that the winner in the presidential race will also enjoy a majority in both the Senate and the House. Having full control would make decision making much easier. However, this seems unlikely: with the economy still muddling along, the House will likely remain in the hands of the Republicans. With only around a third of Senate members awaiting re-election and the still tight race, the Democrats are likely to remain in control of the upper house.
So, the reaction goes down to the next occupant of the White House.
Challenger Mitt Romney is considered more business / market friendly. In addition, a better cooperation between politicians can be expected under Romney’s presidency: Democrats have been more cooperative with George W. Bush after the financial crisis broke out in 2008, while Republicans gave Obama a hard time in the 2011 debt ceiling debacle.
Markets will expect a swifter resolution of the fiscal cliff issue, a move which lower uncertainty and help the US economy grow faster. An improved US economy could be a locomotive for the whole world, increasing risk appetite.
A victory for Romney is therefore expected to lift stocks, and all currencies apart from the US dollar and the Japanese yen.
A victory for incumbent Obama would probably have the opposite effect, with markets expecting a tougher battle between politicians in the “lame duck” session and a risk of another credit rating downgrade. These expectations would likely trigger a stronger US dollar and Japanese yen, against all other currencies.
After the dust settles, the dollar will move from the actual progress to resolve the fiscal cliff, as well as the Federal Reserve’s next moves on Operation Twist and QE-Infinity, which are clearly correlated with the politicians’ action.
In the much longer run, a victory for Romney would likely result in a significantly weaker dollar, while a victory for Obama would likely result in only a slightly weaker dollar.
Why? History suggests a clear difference between the dollar’s performance (for good and for bad) under Democratic presidents and Republican ones. This correlation is relevant for decades, and is also relevant when comparing Bush and Obama – the dollar performed far worse under Bush.