6 Ways That US Politics Can Affect The Dollar

I’ve been very busy and if you don’t see a lot of posts coming through, that is why.  This is temporary until the wave passes.  The good thing is that I haven’t stopped trading.  I’ve actually been pretty active this month, which is turning out to be quite a good one so far.   

I’ve decided to post something from a guest writer.  It’s original material specifically written for the Forex Project.  Hope you enjoy.

The successful forex trader never loses sight of the big picture. There are hundreds if not thousands of factors that contribute to the strength or weakness of a given currency relative to any other and it is best to avoid getting bogged down in an attempt to wade through this endless swamp of variables. Keeping that in mind, there are certain issues that all forex traders should stay apprised of in order to make the most of their investments. If you make any trades at all involving the US dollar, you had better become a bit of a political junkie.

American politics can affect the dollar in dramatic ways. Every shift in US politics can affect exchange rates, from new legislation and big policy changes to seedy scandals and small shifts inpublic opinion. If you can learn to read the signs, then keeping an eye on the ever-changing political landscape can help you predict which way the dollar is headed. Acquaint yourself with the ins and outs of our government and its political process and you’ll not only become a better citizen, but you might soon be a much richer one as well.

1. The never-ending election cycle: Learning to predict whether foreign investors will react positively or negatively to the periodic changes in our government is a difficult task, but gaining such foresight will be well rewarded. The relative suspicion of or confidence in any new administration can cause investors to buy the dollar in bunches or sell it as fast as they can.
2. The popularity of the Oval Office: Foreign investors tend to show more confidence in a solid leader of the executive branch and often view a popular president as a strong president. Therefore, the rise and fall of the dollar often tends to be closely connected to the current US president’s rise and fall in the opinion polls.
3. Consumer tax cuts: At least in theory, tax cuts or tax rebates should almost always have a bolstering affect on the dollar. Tax cuts are intended to fuel consumer spending and improve the economy, much to the benefit of the dollar. Troubles arise, however, when tax cuts coincide with government expansion and therefore increase the national deficit, a result that can ultimately weaken the dollar.
4. Growing government: Speaking of government expansion, the dollar can be adversely affected by the addition of new government programs that draw funds from other allowances in the budget. The relatively recent creation of the Department of Homeland Security and the vast expansion of the Transportation Security Administration are timely examples of how this type of expansion can influence the dollar.
5. Credit history: Part of what has kept the dollar so strong for so long has been the US government’s excellent record of not defaulting on its debts. The nation’s increasing deficit has been disturbing the dollar in foreign markets, and if US government’s credit begins to suffer, the dollar will surely head south.
6. War: Terrorist attacks can impede economic growth by destroying consumer confidence and curtailing spending. War is expensive and leads to further debt, making foreign investors nervous about the increased risk of default. The dollar can be buoyed by victories and deflated by defeats, so the dollar will be in flux for as long as conflict continues.

Heather Johnson is a freelance finance and economics writer, as well as a regular contributor for CurrencyTrading.net, a site for currency trading and forex trading information. Heather welcomes comments and freelancing job inquiries at heatherjohnson2323@gmail.com

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