• 536 days Will The ECB Continue To Hike Rates?
  • 536 days Forbes: Aramco Remains Largest Company In The Middle East
  • 538 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 938 days Could Crypto Overtake Traditional Investment?
  • 943 days Americans Still Quitting Jobs At Record Pace
  • 945 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 948 days Is The Dollar Too Strong?
  • 948 days Big Tech Disappoints Investors on Earnings Calls
  • 949 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 950 days China Is Quietly Trying To Distance Itself From Russia
  • 951 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 955 days Crypto Investors Won Big In 2021
  • 955 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 956 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 958 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 959 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 962 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 963 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 963 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 965 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

U.S. Dollar, Gold Implications of Election

Alia iacta est! As networks projected an Obama victory, there was a sea of red: the dollar is down versus currencies and gold. As pundits will shift the focus on the fiscal cliff, the market appears firmly focused on what may be more relevant: an Obama win favors a continuation of the current easy money policy. Had Romney won, Fed Chair Bernanke would have become a lame duck, undermining the credibility of the Fed's commitment to keep interest rates low way beyond the end of Bernanke's term in early 2014. With this uncertainty removed, the Fed's increased emphasis on employment is here to stay. The market rewards this certainty by bidding up gold, selling off the dollar versus all major currencies.

We don't believe the fiscal cliff is similarly important: in our "worst-case" scenario, the "cliff" will take place; however, once tax increases and spending cuts have taken effect, Republicans may then agree to cut taxes, thereby keeping their promise not vote for tax increases. While the drama may be worth watching, the market impact may be limited. Note, though, the budget deficit would still exceed 3% before factoring in an economic slowdown. Yet, we won't have come a step closer to entitlement reform. Entitlement reform is unlikely to happen, as we believe the only language policy makers listen to is that of the bond market.

Keep in mind, however, that testing the patience of the bond market in the U.S. might be more dangerous than in the Eurozone: the U.S., unlike the Eurozone, has a significant current account deficit. To a significant extent, foreigners finance the deficit by buying U.S. bonds. Should the bond market impose reform on policy makers in the U.S. by selling off bonds, the implications for the U.S. dollar might be far more severe than they have been for the euro.

As we all hope for the best, we would like to point out to that hope is not a good policy, neither for politicians, nor for investors.

 


Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on currencies. Please also register for our Webinar on Thursday, November 8th, 2012, where we will focus on implications on China and Asian currencies.

 

Back to homepage

Leave a comment

Leave a comment