Currency traders: Obama wins, buy the dollar; McCain wins, short the dollar

Currency traders: Obama wins, buy the dollar; McCain wins, short the dollar

Posted Oct 31st 2008 12:30PM by Joseph Lazzaro
Filed under: International markets, Other issues, Politics, Presidential elections

What's the post-2008 U.S. Presidential Election dollar outlook and the dollar strategy?

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Well, more than likely, the dollar's fate will be largely determined by macroeconomic factors, as well as by fiscal and monetary policy, along with the overall risk appetite/risk aversion climate that hinges on the status of the global financial crisis.

As any economist or currency trader will tell you, that's a full plate of variables, which only underscores the complexity (and difficulty) in determining the direction of currencies.

Nov. 4 election will help determine dollar's fate

Still, fiscal policy plays an important role, and with the aforementioned in mind, look for the following dollar pattern depending on the Tuesday, November 4 Election Day outcome: If U.S. Sen. Barack Obama, D-Illinois, wins, the dollar is likely to strengthen, long-term. If U.S. Sen. John McCain, R-Arizona, wins, the dollar is likely to weaken, long-term.

Currency Trader Eric Simpkins outlined the Obama scenario. Although U.S. budget deficits will initially be high as an Obama presidency begins, an Obama win implies a Democratic Party majority in the U.S. Congress, which will make it easier for Obama to raise taxes on upper income groups, basically those Americans earning more than $250,000 per year.

"Obama's tax increase will cut the U.S. budget deficit and get the revenue and spending lines heading in the right direction, together, which will cause the dollar to rise," Simpkins said. "The U.S. recession will mitigate this somewhat, but that economic negative will be offset by the fact that Europe and other regions will be in recession, too, and will likely recover later, putting pressure on those currencies."


Currency Trader Andrew Resnick outlined the McCain scenario. A McCain win implies only a slight Democratic Party majority in the U.S. Congress, and that fact, combined with traditional Republican Party constituencies/sources of power (wealthy Americans, Corporate America, business owners) indicates McCain is likely to oppose an income tax increase, and certainly oppose income tax increases on upper-income groups.

"Under McCain, the U.S budget deficit situation is not likely to improve much, with budget deficit reductions largely dependent on economic growth, and McCain's ability to cut spending," Resnick said. "Unfortunately, due to Baby Boom retirees, entitlement spending [Social Security, Medicare] will make it very hard to reduce the growth of spending let alone cut it. And with McCain even less likely to cut defense spending, large deficits would continue in a McCain administration, and that continued large borrowing will weaken the dollar."

Further, Simpkins and Resnick agreed that the U.S. trade deficit will play a role in the dollar's fate, as well. Obama is likely to pursue alternative energy sources and conservation measures, which should lower the U.S. bill for imported oil and its trade deficit, which would strengthen the dollar. McCain is likely to vigorously pursue more domestic drilling and selected conservation measures, resulting in only a minor reduction in the trade deficit, which would have a negligible impact on the dollar.

Forex/Economic Analysis: As noted, currency analysis is fraught with complexity and volatility, particularly given the global financial crisis, but assuming the global crisis is resolved, side with the Simpkins, Resnick analysis: Obama wins, dollar higher; McCain wins, dollar lower.