The Dollar Around U.S. Presidential Elections
September 24, 2016
Currency markets should prepare for a bit of turbulence. It has not been unusual to experience elevated dollar movement against the euro and yen in the final calendar quarter of U.S. presidential election years. The average dollar change against the euro between end-September and end-year in the past four election years was 4.9% but would have been greater if not for a net rise of 0.8% in 2008. The other three elections were associated with dollar declines relative to the euro in the fourth quarter of 2.6%, 8.4% and 6.3% in 2012, 2004 and 2000.
In those election years, dollar/yen has been considerably more volatile than the euro in the autumn. Against the yen in the fourth quarter, the dollar rose 11.2% in 2012, fell 14.7% in 2008, dropped 6.7% in 2004, and climbed 6.0% in 2000 against the Japanese currency. The average movement in those four fourth quarters was 10.4%.
Europe’s currency pace-setter before the creation of the euro in 1999 was the Deutsche mark. After the dollar’s value against other major currencies switched in 1973 to a market-determined system from a regime of fixed parities, the dollar recorded the following changes against the mark between end-September and end-year, a drop of 3.2% in 1976, a rise of 8.2% in 1980, a gain of 4.3% in 1984, a drop of 5.7% in 1988, a spike of 14.7% upward in 1992 and a decline of 1.0% in 1996. The dollar fell 4.7% against the yen in 4Q80, rose 3.2% in 4Q84, dropped 7.0% in 4Q88, and increased 4.2% in both 4Q92 and 4Q96.
While a presidential election is held in the United States, there are only three precedents in the era of floating exchange rates when an incumbent did not run for reelection: 1988, 2000, and 2008. Those are the only times when a change of president was 100% assured to happen, which is also the case this year. In 1988, the dollar fell 5.7% against the mark and 7.0% against the yen. By ordinary standards, those are each big moves for a period as compressed as a calendar quarter. In 2000, the dollar advanced 5.9% against the euro but fell 4.0% against the yen in the the final quarter of the year. And in 2008, the modest rise against the euro of less than 1% was more than counterbalanced by a huge 14.7% plunge against the yen.
The first years of presidential terms have seen some of the most dramatic events to shake currency market trading, so there is good reason for traders heading toward and through a presidential election to feel a sense of uncertainty and potential opportunities at such times. 1973 saw the switch from fixed to flexible exchange rates in the spring, the cascading revelations of the Watergate scandal, and the Yom Kippur War that triggered the first Opec oil price shock. In 1977, inflation heated up. 1981 was a year of stagflation. The Fed had abandoned interest rate targeting for an approach oriented around containing monetary growth, and a recession that would last a year and a half broke out at midyear. The dollar was in the early stages of a dramatic upturn.
U.S. policy toward the dollar changed abruptly in 1985 when Don Regan and James Baker switched positions, the latter going from President Reagan’s chief of staff in the first term to Secretary of Treasury in the second one. The first Reagan administration considered the rising dollar a vote of confidence in the correctness of U.S. economic policies, but the second term administration became very concerned about unwanted damage caused by an overvalued dollar and orchestrated the Plaza Summit Accord in September 1985 that would be associated with a halving of the dollar’s value in under three years. In 1989, eastern Europe broke away from the Soviet Union’s grasp. The new Clinton Administration in 1993 took aim on dollar/yen to leverage fairer trade practices from Japan’s government. The Asian debt crisis was triggered in mid-1997 by an unexpected devaluation of the Thai baht.
Terrorism hit the front burner of U.S. foreign policy in 2001 with the World Trade Center attacks. The popularity of the Bush43 Administration suffered in 2005 from an over-reaching and failed effort to privatize social security and the botched handling of Hurricane Katrina in New Orleans. Never had the financial sector been so challenged as by the crisis that ensued after Lehman Brothers failed in September 2008. Panic intensified exponentially that autumn and spilled over into the first winter of the Obama era. Japan launched Abenomics in 2013.
As markets head toward another U.S. presidential election, one lesson to take away from market history are that the dollar has demonstrated a propensity to become unglued in the homestretch of elections, sometimes appreciating and other times falling but most times moving more widely than in a typical calendar quarter. Another lesson is that incoming governments tend to be challenged early by changes of their own design, if not by exogenous shocks that impact their agendas. That’s the history, but in 2016 there is the additional element that never before in our lifetimes has one candidate proposed an agenda that would so profoundly modify U.S. policy and America’s relationships with other nations, whether they be friend or foe.
Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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