Published On: Wed, Nov 7th, 2012

Greenback Drops after Obama’s Re-election

On Wednesday, the United States dollar dropped following President Barack Obama’s re-election. Although the popular vote is yet to be tallied, Obama has enjoyed a resounding victory in the electorate. His election was viewed as a necessity for the Federal Reserve to continue its quantitative easing policy and for it to retain Ben Bernanke as Federal Reserve Chairman. Despite his election, some analysts believe that the greenback could continue to rise due to the impending United States budget proposal. If Congress cannot agree on a budget for the upcoming year, harsh tax increases and spending cuts will take place.

With the end of election uncertainties, riskier currencies and the stock market enjoyed a brief rise. The Australian dollar managed to reach its highest level for almost seven weeks while the Canadian loonie rose to a three week high. Overall the United States dollar fell 0.1 percent versus a basket of currencies. It currently sits at 80.545 which is slightly off of Monday’s two-month peak of 80.843.

Euro Gains

Europe’s currency increased by 0.1 percent to end the day at $1.2825. Its high for the day was $1.28765. Some investors began selling the currency off immediately afterward due to weak economic data coming out of Europe. Greece is expected to vote on austerity measures soon. Without an agreement over budget cuts, the Greek government could slide into bankruptcy. Investors remain cautious about the economic situation in Spain and Greece. In Greece, many people expect that Prime Minister Antonis Samaras will win re-election by a slight margin. Some in his coalition are expected to oppose new budget measures which will make the adoption of any austerity measures difficult.

Stock and foreign exchange markets around the world are also worried that the Spanish government could delay a request for international aid. The longer Spain waits to apply for aid, the more it will weigh on the marketplace. On Thursday, the European Central Bank is supposed to decide on interest rates in the Eurozone. Most analysts believe that the rate will remain the same. Despite this consensus, some investors are still hoping for an interest rate cut due to slowed industrial production in Germany and dismal economic data in the rest of the Eurozone.

For the United States to resolve their budget crisis, they must make a compromise between the Senate and the House of Representatives. Unfortunately, the latest election results show that the Republicans have retained control over the house while the Democrats still hold power over the Senate. With a divided Congress, the United States government will face increasingly tough negotiations as they attempt to resolve their budget crisis. Initial news from the presidential election was overwhelmingly positive for riskier currencies and equities.

The United States dollar dropped versus the Canadian loonie to C$0.9875. Meanwhile, the greenback rose against the yen to 79.81. The Japanese yen is still lower than the four-month peak of 80.68 yen that it reached in the previous week. After briefly touching 79.82, the yen rose to 80.35 yen which makes it roughly the same for the day. Some investors expect that the dollar/yen will retest the high of 80.70. If it breaks this barrier, it could open up the possibility of the yen reaching a high of 84 versus the greenback.

At the same time, the euro rose from the two-month trough of $1.2763 that it touched on Tuesday. It is currently above its 200-day moving average versus the greenback at $1.2827. During the day’s trading session, it did not manage to breach the $1.2878 barrier.

Swiss Reserves Drop

For the first time in eight months, foreign exchange reserves in Switzerland fell. This fall allowed the central bank in Switzerland to further its cap on the franc. In October, the Swiss National Bank reportedly held 424.38 billion francs in reserves. During the month of September, Switzerland held a total of 429.48 francs. This is the first decline in foreign exchange reserves in the nation since February of this year. Presently, the nation holds foreign reserves that equal roughly 72 percent of its gross domestic product.

With a drop in foreign reserves, the Swiss National Bank has been able to strongly pursue its cap of 1.20 versus the euro. It initiated this cap in September of 2011 in order to prevent deflation and a recession in its territory. Despite these measures, foreign currency reserves grew as the Eurozone devolved into an economic crisis. The nation saw a record loss for its foreign exchange holdings in 2010. The loss prompted calls for the resignation of former chairman Philipp Hildebrand. Consumer prices in Switzerland dropped by 0.2 percent last month from their value in 2011. The data issued on Wednesday showed a far higher fall than top analysts had expected. Overall, the Swiss National Bank seeks to keep inflation between zero and two percent. The Swiss government believes that the nation’s gross domestic product should be about one percent for the year. In 2013, GDP is forecasted to increase.

Around the World

In Australia, the Aussie rose 0.4 percent to reach a level of $1.0480. This is its highest level since September 21. Earlier this week, the Australian dollar boasted of impressive gains following a surprise decision by the Reserve Bank of Australia to not cut interest rates.

Asian currencies gained during the trading session with the Korean won leading the way. The won hit 14-month highs versus the greenback.

The Czech crown lagged behind many Eastern European currencies and posted a three-month trough. This drop was due primarily to a dovish stance by the Czech Republic’s Central Bank. In Poland, the zloty gained 0.2 percent while the Hungarian forint also boasted of a 0.2 percent gain. The Russian rouble advanced 0.2 percent versus the United States dollar. In Turkey, the lire managed to increase its weekly gains due to a recent upgrade by Fitch. It hit six-month highs versus the euro. Many investors are waiting for results from the Polish central bank meeting. On average, investors expect the central bank to drop the nation’s interest rates. The average expectation is for a 100 basis point rate cut.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.