Election results creates chaos for the dollar, stocks fall
The dollar fell on Wednesday after U.S. President Barack Obama’s re-election for a second term was seen ensuring Federal Reserve quantitative easing will stay in place.
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But analysts said the dollar’s uptrend could resume if safe-haven flows are prompted by growing worries over the looming U.S. “fiscal cliff”.
The country risks policy paralysis over a sharp fiscal tightening due to start next year unless a deal is reached in Congress to avert it.
The Standard & Poor’s 500 stock futures index at the Chicago Mercantile Exchange fell to its lowest level since early August, erasing gains. December futures were trading around 1,391, down 34.2 points for the day.
The dollar index rose to 80.774 from 80.606 late Tuesday. The euro was holding around $1.2768 versus $1.2817 late Tuesday.
Alan Bush, senior financial futures analyst at ADM Investor Services, said the fiscal cliff worries are “definitely” weighing on equities Wednesday. “The market is down on the prospect of there being no recovery in the U.S. and a higher chance of the fiscal cliff happening,” he said.
The fiscal cliff is a combination of spending cuts and tax hikes that are set to take effect on Jan. 1 unless Congress acts to prevent it from happening.
There’s a bit of relief that there was a clear result in the U.S. presidential election, it’s removed uncertainty which is benefiting pro-cyclical currencies in particular,” said Ian Stannard, head of European currency strategy at Morgan Stanley.
“But this is likely to be short-lived, especially for the euro due to caution about Greece and Spain.”
The U.S. dollar also fell against the Canadian dollar to C$0.9875.
Many were sceptical about the gains in riskier currencies given the looming fiscal problems in the U.S. could hurt growth in the world’s largest economy. Riskier currencies are bought by investors when they are confident about an economic recovery.
“Beyond the initial reaction, the ‘risk on’ sentiment will be challenged at some point by the heightened fiscal cliff threat,” David Bloom, global head of FX strategy at HSBC wrote in a note.
“We believe this may extend dollar’s weakness, but will cap and potentially reverse the rally in “risk on” currencies we expect in the near term.”
