One Party Win Should be Positive for the US Dollar (page 1 of 2)

US Dollar - The US dollar has been treading water for the most part today as currency traders quietly await for the results of tomorrow's US Midterm elections. Although you cannot readily gauge what the currency market is anticipating with the dollar up against the Japanese Yen and down against the Euro, the sharp rally in the stock and bond markets suggest that the traders in other markets are anticipating a political gridlock.

This means that Democrats would win the House while the Republicans may retain control of the Senate or vice versa. The reason why gridlock is perceived as positive for the stock and bond markets is because in governments where there is a one party majority, policies tend to be passed more easily and as such, the governments are likely to spend more, run larger deficits and potentially allow for more inflation.

In cases of gridlock however, it is far more difficult for the government to pass policies, which leaves everything at status quo. Looking back at the last six mid-term elections, the US dollar has rallied in all but one (2002) and in each of these cases, there was a one party majority win. This suggests that the currency market actually likes political harmony and dislikes political gridlock. Therefore, should the Democrats win either the House or Senate, the dollar could resume last month's weakness.

If Republicans retain control on the other hand, November could prove to be a dollar bullish month. According to the Iowa Electronic Markets, Republicans have an 80 percent likelihood of losing control of the House while the odds for maintaining control of the Senate rest at 72 percent. This suggests that gridlock is more likely than harmony. Meanwhile there were no US data released today, but Fed President Moskow was surprisingly hawkish when he said that more rate hikes may be necessary.

This follows slightly more optimistic comments about the housing market from former Fed Chairman Alan Greenspan. There are more speeches by Fed Presidents later this evening and although they are important, the currency market may postpone any reaction until after the election results.

Euro and Swiss Franc - Despite weaker service sector PMI data, producer prices and German factory orders, the Euro managed to register tiny gains against the US dollar. This is quite significant considering that both the Japanese Yen and British pound extended Friday's losses against the greenback. The single currency is probably still riding on the coattails of ECB President Trichet's very hawkish comments last week. ECB member Weber reiterated Trichet's stance this morning and reminded traders that even though the Federal Reserve is not raising interest rates, they are. The only problem is that recent economic data has been deteriorating despite the central bank's loud and clear message.

The EU does not seem to think that the weakness will last, given the upward revisions to their growth forecasts for this year and next, but judging the numbers we have in front of us and the weakness expected in tomorrow's retail sales report, we cannot ignore the possibility that the region's economy may indeed be weakening. Switzerland is set to release their unemployment data tomorrow. The jobless rate is predicted to hold steady at 3.1 percent for the fourth consecutive month. This is the tightest level that Switzerland's labor market has been since 2002.

British Pound - The British pound started the week on a softer footing against both the US dollar and Euro after the release of disappointing industrial and manufacturing production numbers.