How Obama's Victory Affects the USD

11/08/2012 9:00 am EST

Focus: CURRENCIES

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

As the markets’ initial relief gave way to renewed anxiety over the fiscal cliff, US markets dialed back early gains, and Kathy Lien explains what the victory portends for the world’s reserve currency.

When President Obama’s landslide victory became clear Tuesday night, investors celebrated by pushing currencies and equities higher, but when North American traders returned to their desks bleary eyed Wednesday from watching the speeches at 1:30 am, they found the EUR/USD at its lowest level since September 7, and Dow futures down more than 100 points. While investors were initially excited about Obama’s victory, the President won’t be as kind to the financial markets as Mitt Romney. In our 2012 Election Preview, we discussed how Obama’s policies are more negative for the dollar, but the real takeaway is that they are more negative for risk appetite. As the US dollar trades lower against the Japanese yen and higher against other currencies, risk aversion is the main theme in the financial markets Wednesday.

President Obama’s victory comes as a concern for the financial markets for a variety of reasons. First and foremost, the sell-off in risk reflects the prospect of higher taxes for multinational corporations, wealthy individuals, and anyone earning capital gains and dividends. Secondly President Obama’s victory means that Fed Chairman Ben Bernanke won’t be out of work next year and Helicopter Ben will get to continue his open ended QE program, which is bearish for the dollar. The President’s first task will be to deal with the Fiscal Cliff and it won’t be made any easier with Republicans continuing to control the House and Democrats controlling the Senate. Nonetheless Obama’s victory could give him a renewed focus and energy to do everything that it takes to attain bipartisan cooperation. The price action in the financial markets Wednesday was very similar to the price action the day after the Election in 2008, where the EUR/USD, USD/JPY, and S&P 500 fell for the next 10 trading days.

ECB Draghi Comments Kicked off EUR/USD Sell-Off
However we cannot completely blame the turn in risk on the President’s victory. The sell-off in the EUR/USD and US equity futures coincided with comments from ECB President Draghi who said, “data suggests economic slowdown has reached Germany.” The European Commission downgraded euro-area growth forecasts for 2012 and 2013 with a particularly sharp cut to German 2013 GDP growth. Back in May, the EC predicted 1.7% growth in Germany next year, but now they are only looking for the Eurozone’s largest economy to expand by only 0.8%. They also expect Spain to miss their budget forecast by a wide margin, increasing the need for a bailout. The head of the ECB admitted that German rates are lower than they would be otherwise because the debt crisis is artificially inflating demand for German bonds. With the ECB gearing up for a monetary policy announcement later this week, Wednesday’s cautionary comments from Mario Draghi could be seen as a preview to the main event—don’t expect any positive comments from the central bank today.

By Kathy Lien, Co-Founder, BKForex.com

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