Macroeconomic policies and relative fundamentals will dictate the trend in the dollar.
A ccording to our Foreign Exchange Strategy service, there is no relationship between the political party controlling the White House and the U.S. dollar. The dollar has been in a forty year secular bear market that was interrupted with just two cyclical rallies, each lasting about 5-6 years.
- The first occurred in the early 1980s under a Republican president.
- The second took place in the late 1990s under a Democratic president.
Rather than party affiliation, macroeconomic policies and relative fundamentals will dictate the trend in the U.S. dollar. Importantly, regardless of who wins the November 6 election, there is unlikely to be a major change to current economic policies.
Although there are different priorities between extending tax cuts and limiting spending cuts, both political parties want to avoid the “fiscal cliff” next year. Therefore, the near-term outlook is for large fiscal deficits under either party.
As for monetary policy, Governor Romney has said that he will not reappoint Bernanke as chairman of the Federal Reserve when his current term expires on January 31, 2014. Even if President Obama is re-elected, there is no guarantee that Bernanke will seek another term. Therefore, no matter who is in the White House, there could be a new Fed chairman in 2014. But from now until January 2014, the Fed’s balance sheet will continue growing.
Bottom Line: The November 6 election is unlikely to result in any immediate material changes to U.S. macroeconomic policies. Large fiscal deficits will persist and the Fed’s balance sheet will continue to inflate.
These policies will exert downward pressure on the dollar.