Preliminary findings

Posted by Scriptaty | 5:38 AM

To determine if there is a connection between the presidential term cycle and the U.S. dollar, we framed the dollar’s performance in terms of presidential terms during the floating exchange-rate period. The preliminary findings suggest a very limited, though potentially important, impact of the presidential cycle on the dollar.

Limiting the analysis to the most actively traded currency pair, the dollar vs. the euro (and vs. German deutschemark before it), we analyzed how the dollar fared during each year of the four-year presidential term.

In the first and third years there seemed to be no obvious pattern, with the dollar rising and falling an equal number of times. There may be a firmer dollar bias in the fourth year, with the dollar rising six out of nine times by an average of 4.2 percent. Also, the range of worst to best dollar performance in the fourth year appears somewhat narrower than in the other years.

The strongest connection occurs in the second year of a president’s term, during which the dollar fell seven out of eight times by an average of almost 11 percent.

The other regularity during the second year of a presidential term relates to partisanship. Given the current political polarization in Washington, one could be forgiven for trying to assign blame (or credit) for the dollar’s fortunes to a particular political party. However, the data suggests political affiliation does not have a major effect, with the dollar’s performance during the second year under Republican and Democrat presidents almost identical.

The dollar has fallen 10.28 percent during the second year of Democrat presidents and 10.53 percent during those of Republicans. In both the first and third years, the dollar tends to rise more under Democrats than Republicans. In the fourth year, the dollar has tended to rally on average, regardless of the president’s party.

However, the greenback’s performance is more pronounced under Democrats, rising more than three times as much than under Republicans.

Last year, the greenback gained about 14.4 percent against the euro. On average, however, the dollar has fallen 3 percent during the first year of a president’s term. The dollar’s performance last year was among the strongest during the first year of a presidential term, and was especially impressive because many people expected a continued decline after the dollar’s dismal showing in the fourth quarter of 2004.

The dollar’s performance this year, the second year of President Bush’s second term, is largely in line with the historical average. The dollar declined about 7.4 percent against the euro in the first half of the year — a little more than half the average historic decline.

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