Thursday, October 27, 2005


'Government Malfeasance' Hurts Currency

Market Watch sees implications for the US currency out of the political scandals in Washington. "The U.S. dollar, Treasurys and American stocks could sell off if top White House aides are indicted on charges they leaked the identity of a CIA employee, analysts said Thursday. Any charges could create 'political paralysis' at the White House, said Brian Dolan, head of currency research at New Jersey-based trading firm Gain Capital."

"Charges would be 'detrimental to the dollar, a psychological blow,' said Alex Beuzelin. They would distract Bush from important economic issues like high energy prices, patches of slower growth and deficit reduction, he said. The dollar's year-to-date run may be in jeopardy should confidence in Bush's ability to steer the economy be shaken."

"A weaker dollar could raise inflation risks at a time that the Federal Reserve is working furiously to stamp out its spread from high energy prices. U.S. bond yields could rise further if foreigners become less willing to hold so much U.S. debt, raising borrowing costs. Stocks, too, might suffer, but the damage would likely be less than in the 'emotional' currency market that tends to be more politically sensitive, said Dolan."

"'If corporate malfeasance is bad for a firm's stock where senior executives run amuck, it should follow that government malfeasance should impact negatively a country's debt and currency,' said David Gilmore. 'If it were only so easy, exceptions are the rule not the exception.'"

"The best historical reference for investors may be the fallout of the Watergate scandal, which was limited to Nixon aides, although did ultimately lead to the president's resignation, said Dolan. But the U.S. was just coming off the gold standard at that time, so currency markets behaved differently than they do today."

"More recent memory reminds that the dollar was hammered leading up to and in the immediate wake of the impeachment of President Bill Clinton on perjury and obstruction of justice charges tied to the cover up of his affair with intern Monica Lewinsky. Over a five-day period in January 1998 that followed the first mention of Lewinsky, the dollar shed a swift 3.3% against the German mark, the pre-euro proxy for European currencies. The dollar reclaimed that decline during the following week."

"The greenback fell over several days to a four-month low against the Japanese yen during December 1998, when the House approved two articles of impeachment against Clinton."

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