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. Last Updated: 07/27/2016

Republican Victory in U.S. Boosts Dollar

LONDON -- The dollar was up two pfennigs on the day at the close of European trading Wednesday after the Republicans' resounding victory in Tuesday's U.S. mid-term elections.


"It's another reflection of the fact there is an inherent predisposition in the financial markets towards the right wing," said one currency analyst at a U.S. bank. Malcolm Barr, international economist at Chemical Bank in London, said the market had come up with other reasons for the dollar's gains. "First, we had such an unambiguous result it took uncertainty out of the market.


"Second, some have been suggesting the Republicans are going to be keener on deficit control than the Democrats, which is going to be good for the currency and bond market," Barr said.


But after the European close the dollar began to retreat as Wall Street lost its early optimism and sank below Tuesday's close. At London close, the dollar was at 1.5255 marks and 97.65 yen compared with its earlier peak around 1.5290 marks and 97.80 yen. But the figures were still sharply up on the 1.5095 and 97.02 recorded in Europe late Tuesday.


Clinton lost control of both the U.S. Senate and House of Representatives but the dollar did not suffer from fears that the president might now find it far harder to govern. "The result was perceived beforehand as dollar-negative as it implied gridlock. However, it has bounced since," said Gerard Lyons, chief economist at Japanese bank DKB International in London.


Barr said there was a final argument that the Republicans were likely to push for middle-class income tax cuts, leading the U.S. Federal Reserve to raise interest rates faster than it was planning to counter this new threat to inflation.


Looking further ahead, analysts said a Republican-dominated legislature was likely to be more attractive for direct investment, such as companies looking to set up production sites.