U.S. presidential election leaves dollar investors flat

Monday, 2 July 2012 00:44 -     - {{hitsCtrl.values.hits}}

Reuters: Romney or Obama? Republican or Democrat? The U.S. presidential election may inflame voter passions, but based on past experience, whoever wins the world’s most powerful elected office isn’t likely to move the dollar.

The U.S. dollar’s performance over the past 40 years shows little relation to the party holding the presidency and more to do with the global and domestic economies.

Its post-election performance will hinge on factors ranging from the euro zone debt crisis to corporate profits and Federal Reserve policy. Congressional elections will play a major role, with a raft of U.S. budget issues converging at year-end.

Also, while the dollar has strengthened during Europe’s crisis, a full recovery from the greenback’s decade-long downtrend is not a foregone conclusion, with recent data showing strong economic headwinds for the United States.

“The dollar is benefiting from the mess in the euro zone, but things are not much better here,” said Axel Merk, portfolio manager of the $650 million Merk Hard Currency Fund in Palo Alto, California. “I don’t have too much confidence in either candidate.”

Under President Barack Obama, a Democrat, the dollar’s value against a basket of six currencies .DXY has fallen 5.4 percent since he took office in January, 2009.

So how did the dollar do under past presidents?

Republican Richard Nixon ended the gold standard and fixed exchange rates existing since World War Two. From that point in 1971 to his 1974 resignation, the dollar fell 13.78 percent.

The economy, however, grew 3.4 percent, 5.3 percent and 5.8 percent in 1971, 1972 and 1973, respectively, before shrinking by 0.6 percent in 1974.

The dollar bounced back modestly under Republican Gerald Ford and then tumbled 13 percent during the four-year term of Democrat Jimmy Carter in the late 1970s.

Modest gains under Ronald Reagan were mostly erased during fellow Republican George H. Bush’s administration.

Democrat President Bill Clinton’s eight-year term coincided with a 20 percent gain in the dollar, which was then obliterated by the 23 percent fall during Republican President George W. Bush’s eight years in office. That was the worst drop during any presidency since the move to flexible exchange rates in 1971. The dollar’s drop for the majority of President George W. Bush’s time in the White House came against a backdrop of modest-to-strong economic growth. Gross domestic product was as low as 1 percent in 2007, but as high as 4.1 percent and 3.5 percent in 2000 and 2004, respectively.

During Bush’s last year in the oval office, 2008, the economy shrank by 0.3 percent as the worst recession since the Great Depression took hold in the latter part of the year.

Swings in the dollar’s performance can be even more dramatic when considering an eight-year presidency from the first term to the next.

The dollar index gained nearly 67 percent in the first four years of Reagan’s term but fell 37 percent in the second, leaving it with a 5.3 percent gain overall.

In the Clinton years, the dollar dipped marginally in his first term before surging more than 20 percent in the second. Most of the drop under George W. Bush occurred in the first term, followed by a slight gain in the second.

That pattern leaves Obama looking largely average and the potential for the winner of November’s election to look much better to dollar investors, or equally, much worse.

“It is still early to conclude definitively regarding the U.S. election and the dollar because the make-up of both houses and their relationship with the White House is just as important as the outright winner of the presidential race,” said Ken Dickson, investment director of currencies at Standard Life Investments, which manages assets $256.6 billion.

“The best result would be a real consensus to plan to tackle the deficit within a time scale that avoids the risk of harming the still-fragile growth recovery,” said Dickson.

Chris Fernandes, vice president, senior foreign exchange adviser for the capital markets division at Bank of the West in San Ramon, California, said currency moves stemming from the presidential campaign would likely come from a congressional stalemate, “as both sides dig in their heels prior to November.”

Fernandes, who helps oversee the capital markets division’s almost $10 billion in assets under management, including currencies, added: “However, given the entrenched Washington deadlock that we have witnessed over the past few years, even that scenario has long been priced into foreign exchange markets.”