US election prompts currency jitters-traders

The US election was the talk of the markets yesterday as traders and analysts speculated that the contest was responsible for the European Central Bank's jitters.

Speculation was rife about possible reasons for the ECB's unilateral intervention which is so singularly failing to spark a sustained revival in the euro.

The theory is that a Republican win for Mr George Bush could lead to a significant boost for the dollar over the coming months. If so, proponents argue, the ECB has to act now to stop the euro sinking further.

Most analysts agree, however, that, while the intervention over the past few days has failed to boost the currency, it should put a floor under it in the short term.

According to Mr Austin Hughes, of Irish Intercontinental Bank, the large tax cuts likely under Mr Bush could lead to pressure for higher interest rates over the medium term, boosting returns on the dollar and hence its attractiveness.

However, it could be argued such a policy would undermine equity markets and hence the dollar through a more circuitous route.

In any case, the administration does not come into place until January 20th leaving time to see what sort of policies emerge once the victor is known. But the key is probably the US policy on intervention. A Bush administration is likely to be even more against selling the dollar than a Gore one.

A senior Bush adviser and former Federal Reserve governor, Mr Larry Lindsey, has already said intervention is a bad idea. And as a front-runner for the key post of treasury secretary, if Mr Bush wins, his views are being taken seriously by the markets.

A win for Mr Gore would mean more continuity and it is possible that the current Treasury Secretary, Mr Larry Summers, would retain his position. He has been adamant in recent weeks that the policy is for a strong dollar. Nevertheless he has already agreed once, however reluctantly, to US intervention and thus may do so again.

There was also talk yesterday that the ECB could choose to start selling its massive dollar reserves. According to Mr Tony Norfield, global head of foreign exchange research at ABN Amro, it is very unlikely that the ECB would choose to divest the holdings rapidly with the intention of destabilising the dollar, as some have suggested.