Think Clinton, think dollar

LONDON: An unchanged political landscape after yesterday’s US presidential and congressional elections might prompt traders to sell the dollar in anticipation of more damaging political gridlock.
But mutual funds’ familiar warning to investors may also apply in the political arena: past performance does not necessarily predict future results.
Political gridlock, with the Republicans retaining control of the House of Representatives, will make it more difficult for policymakers to compromise in their efforts to address the burgeoning US deficits and a “fiscal cliff” of tax hikes and spending cuts.
But that does not mean the challenges are insurmountable.
“We want our children to live in an America that isn’t burdened with debt,” the re-elected US President Barack Obama said in his victory speech.
“I am looking forward to working with the leaders of both parties.... reducing our deficit,” he said.
Republicans in the House will strike a hard bargain but the party will already have one eye on the 2014 mid-term elections and on how to position itself for 2016, when Obama leaves the political stage.
History may provide some clues.
In his second term, faced with bitter opposition from a Republican-dominated Congress but freed from the need to seek re-election, Democratic President Bill Clinton forced through measures that addressed the fiscal deficit.
Obama could take a similar view.
Traders who might wish to sell the dollar also have to find something to sell it against, especially given that the US economy has been performing rather better than either those of the euro zone or Japan.
In the euro zone, there are unresolved issues, as the importance of yesterday’s Greek parliamentary vote on further austerity measures, shows, that will hobble the single currency.
In Japan, if there is one piece of common ground between the two major political parties, it is that the yen should not strengthen.
Selling the dollar against either of the euro or yen arguably entails a substantial leap of faith.
An unchanged political landscape in Washington need not mean a lower dollar.

— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.