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Dollar Falls Ahead of Rate Decisions, US Election

Reuters
Tuesday, 4 Nov 2008 | 9:40 AM ET

The dollar fell against most major currencies Tuesday as investors await the result of the U.S. Presidential election and look toward central bank meetings later in the week.

Dollars and Euro
Dollars and Euro

Trade was subdued as U.S. investors went to the polls but a victory by Democrat Barack Obama, which is widely anticipated by the markets, is seen as dollar positive given he could have an easier time passing his administration's agenda through the Democrat-controlled Congress.

The Reserve Bank of Australia cut rates by a more-than-expected 75 basis points and the European Central Bank and Bank of England meet later in the week.

Though rate cuts typically erode support for a currency, given the global financial crisis, moves to stimulate economies are being seen as currency positive.

"Clearly there is interest out there to buy the dollar but there is a little bit of taking money off the table in very short-term long dollar positions," said John McCarthy, director of foreign exchange trading at ING Capital Markets. "Today is a weird day, the market is a bit nervous."

In early New York trade, the dollar index, which measures the U.S. unit's value against a basket of currencies, was down 1.6 percent at 85.363.

The euro was up 1against the dollar and the yen .

The dollar was also up versus the yen.

The Australian dollar bounced back from an early fall against the U.S. currency after the Reserve Bank of Australia cut rates by 75 basis points to 5.25 percent, more than the expected 50 basis points.

Analysts said the euro was benefiting from the Aussie's comeback, with the prospect of further large interest rate cuts from the European Central Bank and Bank of England on Thursday seen as stimulative to their respective economies.

"The current grim economic conditions could justify a cut of any magnitude," Calyon analysts wrote in a research note on prospects for UK monetary easing.

Election

As Americans voted on Tuesday, Obama was seen leading in the polls in five out of 8 key states.

Though an Obama victory was seen as marginally more dollar positive, even a surprise win by Republican John McCain could be supportive for the dollar, some said.

"In the broader picture, the fact that (President George W.) Bush, who has taken a benign neglect stance to the dollar, is leaving will be taken as a dollar positive," said Derek Halpenny, European head of global currency research for Bank of Tokyo-Mitsubishi-UFJ in London.

Obama was the winner in Dixville Notch, New Hampshire, the tiny town that traditionally opens presidential voting right after midnight.

He gained 15 votes to McCain's six, becoming the first Democrat to win there since Hubert Humphrey in 1968.

Trends in the race could become clearer soon after the first polls begin to close at 6 p.m. New York time in Indiana and Kentucky on Tuesday.

Voting ends over the next six hours in the other 48 states.

Obama expanded his national lead to 11 points over McCain in a Reuters/C-SPAN/Zogby tracing poll, up from 7 points on Sunday.

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The telephone poll has a margin of error of 2.9 percentage points.

Democrats are also expected to expand their majorities in both chambers of Congress.

Combined with an Obama victory, that would make it easier for his administration to push through activist policies to boost markets.

But there was some risk of the Democrats holding too much power, some analysts said.

"A landside Obama victory may raise the fear that Obama may shift more to the left, prompting a dollar-negative reaction in the short-term," BTM-UFJ's Halpenny said.

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