The US Dollar has weakened on the back of President Obama’s re-election after the markets were bolstered into buying riskier assets such as the Australian Dollar and South African Rand.
The Dollar fell once the news broke because President Obama’s re-election means the Federal Reserve is likely to stick to its policy of quantitative easing (QE) – injecting fresh money into the US financial system.
QE is designed to boost lending, and therefore economic growth, but it can have a weakening effect on the currency.
Now that the business of the long election is over, Obama is now faced with a US budget clash in congress. Under a deal reached last year between President Obama and the Republican-controlled Congress, existing stimulus measures – mostly tax cuts – will expire on 1 January 2013.
Obama will need to secure a deal with a hostile house to avoid the so-called ‘fiscal cliff’, a scheme that proposes up to $600 billion of tax rises and spending cuts. Unless the President can negotiate terms the plan will implement into the US economy in January 2014.
Michael Hewson, a senior analyst from CMC Markets, said the markets had “adjusted to the fact that there would be continuity with respect to the economic policies of the last four years”.
“What it doesn’t change is the problems facing the US economy, and the roadblock that is the fiscal cliff. Once the euphoria of an Obama win has died down, this is likely to be the one thing that markets and investors focus their attention on,” he said.
The cliff would see tax rises and spending cuts coming into force across a number of days in January. It would spell the end for a tax relief scheme for middle earners, a reduction in the pay for Medicare doctors and a slash to the funding of a government administered healthcare programme. Investors are fearful that if the cliff cannot be avoided it could be a severe blow to the USA’s chances of resuming its slow but steady economic recovery an even send the nation back into recession.
Obama a Democrat faces a difficult task to renegotiate the policy as Congress is comprised with a majority of Republicans. They want to see a fall in the amount of government spending in order to reduce the USA’s budget deficit whereas the Democrats want an increase in taxation rather than slash public services.
Jeff Cleveland, senior economist at US investment fund Payden & Rygel, told the BBC that he expected the fiscal cliff to be avoided.
“I think we will get through the next couple of months, I think there will be some sort of deal or negotiation, and we will move onto a lower unemployment rate and stronger economic growth,” he said.
Aside from the fiscal cliff Obama is faced with the challenge of reducing the unemployment rate. Job creation is heading in the right direction with new jobs being created month on month but the market remains highly volatile and vulnerable to outside economic factors such as the Euro crisis and slowdown of the Chinese economy.
It’s certainly going to be a tough four years for the 44th President.
The Pound to Euro exchange rate is currently trading at 1.2493
The Pound to US Dollar exchange rate is currently trading at 1.5993
The Pound to Australian Dollar exchange rate is currently trading at 1.5305
The Pound to New Zealand Dollar exchange rate is currently trading at 1.9284
The Pound to Canadian Dollar exchange rate is currently trading at 1.5848
The US Dollar to Pound exchange rate is currently trading at 0.6239
The US Dollar to Euro exchange rate is currently trading at 0.7771
The US Dollar to Canadian Dollar exchange rate is currently trading at 0.9883
The US Dollar to Australian Dollar exchange rate is currently trading at 0.9554
The US Dollar to New Zealand Dollar exchange rate is currently trading at 1.2070
The US Dollar to Japanese Yen exchange rate is currently trading at 80.1000
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