Four More Years of Dollar Weakness?

By Holter, James T. | Modern Trader, September 15, 2004 | Go to article overview

Four More Years of Dollar Weakness?


Holter, James T., Modern Trader


Most describe the foreign exchange markets as macro driven. Few events are more "macro" than the once-every-four-years U.S. presidential election.

Currency moves following the presidential election tend to follow through for months, even years. But data indicate it is difficult if not impossible to predict U.S. dollar strength or weakness based on the winning candidate.

The table below shows the performance of the pound vs. the dollar going back to the 1976 election, the first election following the modern era of currency trading. To maintain continuity and data integrity, front month British pound futures traded on the Chicago Mercantile Exchange's International Monetary Market are used. With IMM futures quoted in terms of the dollar, a percentage increase in the table indicates a strengthening pound and a weakening dollar.

While the sample size is small, it does support the logic that when the political party of the sitting president changes--creating, therefore, a significant shift in the fiscal and trade policies of the country as a whole--that the effects on the relationship between the pound and the dollar persist for the duration of the presidential term:

* In 1976 when Democrat Jimmy Carter unseated incumbent Republican Gerald Ford, the pound, which was stronger both six months and one year later, had appreciated 57.73% vs. the dollar by the time Carter's first term was up.

* In 1980 when Republican Ronald Reagan defeated Carter, the pound lost 10% vs. the dollar after six months, 22% after one year and 47% by the end of Reagan's first term.

* Parties didn't shift again until Bill Clinton defeated George H.W. Bush in 1992. There was little follow-through then, with the country battling its way out of a recession during Clinton's first term. Dollar strength prevailed and persisted through much of Clinton's second term, however, with the pound losing 12 percentage points vs. the dollar by 2000.

* After George W. Bush defeated the Democratic nominee Al Gore in 2000, the pound gained steadily against the dollar until four years later when it was up more than 26%.

The point isn't Republicans are dollar bullish or vice versa. The number of inputs affecting currency prices is too vast and variable significance is too undulating to make such a blanket statement. It's that the limited data available back the premise that when the political party in the White House changes, dollar policy shifts to a bias that can last until the next election.

2004: TOO CLOSE TO CALL

As for this year's election, analysts echo the advice that you can't trade currencies in a vacuum.

"Personally, I don't think it makes much difference who's in office concerning the dollar," says Rick Alexander, analyst with the Zaner Group. "Policy changes take time and economic cycles usually win out no matter who is president. …

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