Barack Obama favors a stronger dollar "need for strong currency"
NEW YORK (Reuters) - With Democratic Senator Barack Obama headed to the White
House, the U.S. dollar looks poised to continue its four-month rally over the
coming months, especially if the new administration embraces a strong currency
policy to help attract much-needed capital inflows.
Under Obama, the United States will have to sell a raft of new debt to maintain
funding for two wars, pay for a massive bailout package aimed at unlocking
tight credit markets and fund a potential second stimulus plan.
Attracting investors to new U.S. debt will be a top priority, and a strong
dollar will be crucial in luring fresh cash into the United States.
Greg Salvaggio, senior vice president for capital markets at Tempus Consulting
in Washington, said Obama's win will probably "harken back to a very strong
dollar policy," largely because of "all the borrowing Treasury is going to have
to do" to finance two wars, a financial bailout plan, and possibly a large
public works program to tackle rising unemployment.
Salvaggio said in such an environment, the "U.S. will need to attract capital."
While the Bush White House has often said it supports a strong dollar, it did
little to prevent a steep decline in the greenback because a weaker currency
was an important step in rebalancing a global economy plagued by a massive U.S.
trade deficit and huge Chinese surplus.
A weaker dollar makes U.S. exports cheaper and it helped prop up the economy
earlier this year. Yet it also sparked some uncomfortable discussions on
whether the greenback was losing its primacy as the global currency of choice.
Salvaggio added that the presence in Obama's campaign of ex-Clinton economic
hands such as former Treasury Secretary Robert Rubin, ex-Harvard University
President Lawrence Summers, and ex-Federal Reserve chief Paul Volcker -- all
strong dollar proponents -- also bodes well for the dollar's fortunes.
And if history is any guide, the dollar may be set to perform well anyway, as
the currency tends to do marginally better under Democratic administrations
than Republican ones.
The eight-year term of President Bill Clinton, the last Democrat to inhabit the
White House, coincided with a 20.3 percent gain in the dollar against a basket
of currencies, although the currency benefited from a drop in U.S. defense
spending as the cold war ended.
The underreported economic news of the week is that Barack Obama favors a
stronger dollar. Even better, he thinks a stronger greenback would help to
reduce oil prices.
That at least is what the Democratic Presidential candidate told a town hall
forum in Parma, Ohio, on Tuesday. "If we had a strengthening of the dollar,
that would help" reduce fuel costs, he said, according to a Reuters dispatch
ignored by most of the media.
This ought to be a bigger story. In linking the dollar to oil prices, Mr. Obama
is pointedly at odds with the Bush Administration and Federal Reserve, both of
which blame high commodity prices on supply and demand, despite falling demand
due to slower global growth. Fed officials -- in particular, Vice Chairman
Donald Kohn -- have expressly rejected any strong link between the dollar's
collapse and the oil price surge since last August.
This conveniently absolves the Fed and Bush Treasury of responsibility for the
consequences of what has been their destructive and all but explicit dollar
devaluation strategy. If the Illinois Senator rejects greenback debasement,
that's the best news to date about Obamanomics.
Reuters also quoted Mr. Obama as saying "The way to strengthen the dollar is
for us to get our economy back in shape." On that point, he has it backward:
Strengthening the dollar would help the economy -- by making the U.S. a
destination for capital, and especially by reducing the inflation in food and
energy prices that has pounded the American middle class. Those price hikes may
yet tilt the economy into a recession it could otherwise avoid
CONFIDENCE IN U.S. ASSETS
Compare that with President George W. Bush's term, which saw a 35 percent
plunge in the greenback from the time he took office in January 2001 to July
2008, the height of the global credit crisis. The dollar has since recovered 20
percent from July's trough, but was still down 20 percent during Bush's
eight-year stint.
Analysts also said Obama's victory should further boost confidence in the U.S.
economy and its assets, which should underpin the dollar even more.
The dollar is currently in the midst of a blistering rally, gaining 10 percent
against a basket of currencies so far this year, amid a global deleveraging
process that saw investors scrambling to buy the greenback to repay
dollar-denominated loans. These dollar borrowings had funded higher-yielding
and riskier portfolio bets by investors.
That trend is likely to persist as market participants looked to snap up more
U.S. assets after the decisive election of a candidate that promised to bring
sweeping changes to a country mired in the worst economic crisis since the
Great Depression.
"Obama's victory should mark an injection of confidence in the United States
and therefore would be good for the performance of equity markets and portfolio
flows into U.S. assets," said Marco Annunziata, global head of economics and
foreign exchange research at UniCredit Markets & Investment Banking in London.
"It also reinforces the leadership image of the U.S. and if you think of all
the debate about the possibility of the dollar losing its status as a reserve
currency, I think the success of Obama will likely put to rest doubts on the
dollar."
