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How will the US Presidential Elections Impact the Dollar?
By Kathy Lien, Chief Strategist of Forex Capital Markets LLC, DailyFX.com
Published Date: October 15, 2004

With less than 3 weeks until the US Presidential Elections, FX market watchers are looking for clues as to how the US dollar and other
financial markets could perform on the heels of a Republican or Democratic victory. The candidates are running neck and neck
following the third and final debate and it is still unclear who the winner will be. This means that positioning remains skeptical and the
market does not have enough information to discount a victory by a particular party prior to the election. Although it is difficult to
correctly assess exactly how the dollar will move on a Bush or Kerry victory, if history can be used as a reliable benchmark, success by
one candidate may be worse for the dollar than the other.

Republican Incumbent Candidate – George W. Bush

Considering solely the economic policy implications of a Bush victory, the market might reasonably expect the dollar to continue its
downward trend against its major counterparts. Thus far, President Bush has been fiscally liberal, cutting taxes and increasing noninterest
federal spending by 8% annually. In response to sizable job losses in several swing states, Bush has sought to make job
creation a key domestic priority, evidenced by a $23 billion proposal for job training and employment assistance in fiscal year 2005.
Given the stagnant labor market, the Administration would be ill advised to do anything other than maintain its “soft dollar” policy that
has been enhancing the competitiveness of American manufacturers and multinationals.
Moreover, taking a look at history, Republican Presidents tend to be more positive for the dollar than Democratic Presidents. This of
course does not always hold true. For example Republican President Regan succumbed to domestic politics and endorsed the Plaza
Accord, which was aimed at depreciating the value of the dollar. The continuation of other Bush fiscal policies aimed at stimulating
growth could also be viewed as potential medium-term dollar negatives. Bush’s bid to make permanent the tax cuts from his electionyear
plan threatens to erode confidence in the greenback by creating persistently wider fiscal deficits. The 10-year cost of such an
extension could be between 1 and 2 trillion dollars. Although the President has promised to cut the federal budget deficit in half over
the next five years, making the tax cut permanent would make it very difficult for him to achieve this goal. Yet Republican Presidents
have favorable tax policies for US corporations, which could help boost stocks.
Although some may argue that the less negative dollar ramifications of the incumbent President’s reelection may be less applicable in
the upcoming election, markets (and the dollar) have generally welcomed a steady financial policy. New presidents tend to often
administer “bitter medicine” to correct economic problems once they take office in what may be taken as “correcting the previous
administration’s problems.”
Democratic Candidate – John Kerry

Expectations for a second Bush term would mark a continuation of the economic status quo, namely a currency policy in tacit support of
a weaker dollar. Yet the market may respond positively to Democratic candidate John Kerry’s fiscal responsibility measures. Both
candidates have pledged to halve the federal budget deficit. However, Kerry’s plan to reverse President Bush’s tax cuts and to raise
taxes on long-term capital gains from 15% to 20% and the top rate on dividends from 15% to 39.6% may give him a head start.
However although Kerry advocates more fiscal responsibility, his policies may lead to looser monetary policy. Cutting back spending
may force the Federal Reserve to slow the removal of monetary policy accommodation in order to effectively give enough stimulus to
an economy that is still struggling to accelerate growth. With talks of protectionism and the intention of raising taxes on long-term
capital gains from 15% to 20% and the top rate on dividends from 15% to 39.6%, he is seen as negative for stocks and positive for
bonds. Kerry’s bid to reverse Bush’s tax cuts could also crimp consumer spending. Essentially higher tax rates and more regulations
could slow GDP growth, economic efficiency and productivity. Also, if Republicans retain full control of Congress and the House (which
appears likely), a victory by Kerry would mean a divided government. This is exceptionally important since all tax laws originate from
the House. The only respite would be foreign reaction towards a Kerry victory. Some believe that Kerry’s foreign policies would be
more inclusive and viewed positively. This could reduce some of the risk premium that foreigners may have placed on US assets.

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