The Bush-Dollar Curve

Obscure economic indicator: Does the dollar fall when the president is unpopular?

Quick quiz: Is the dollar weak because Americans think President Bush is a miserable failure?

Tom Gallagher of the ISI Group has observed a bizarre, and obscure, economic indicator: The fortunes of the American president and the fortunes of the American currency seem to move in tandem. Though there is no clear reason the dollar and the president’s popularity should be connected,  as the chart shows, for at least the past 18 years, there has been what Gallagher calls “a loose correlation” between presidential approval ratings, as measured by the Gallup organization, and the value of the U.S. currency, as measured by the trade-weighted dollar. In general, the dollar is buoyant against its global competition when Americans approve of their president. Performance slumps when Americans disapprove. Both President Bush and the greenback have been in the grips of a steep decline since their respective early-2002 peaks.

Now, Gallagher has more hedges around this simple data presentation than you’ll find ringing estates in Southampton. Correlation does not imply causation. He is quick to note that there are a gazillion-and-one factors that influence the market values of currencies and presidents. Since currency traders and Americans are essentially economic beings, it could be that they tend to buy the security (the dollar, or the president) when the U.S. economy is thriving and short it when the U.S. economy is in the dumps. In other words, both the presidential approval ratings and the dollar may be following economic health and are independent of each other.

Gallagher, though almost sheepish about boiling down the complexity of the dollar-president relationship to a chart, puts forth a poli-sci argument about how a weak president might help weaken the dollar. “I think it makes sense that the political standing of the president is a factor in the dollar’s value,” he said. Just as the dollar occupies an outsized role in the global currency stage, so does the U.S. president. If the president is politically weak, then Congress has a stronger hand. And, international investors like to a see a strong U.S. executive because they prefer a single national decider setting the agenda and fear a fractious, parochial Congress—regardless of which party controls which branch of government. “You’d rather have the person with the national perspective running economic policy,” he said.

The Bush-dollar curve may also have a psychological component. By definition, a currency that isn’t backed by a precious metal is backed by faith and confidence. In general, the dollar tends to strengthen when investors believe the U.S. economy is churning ahead and outperforming other economies, as was the case in the late 1990s, and tends to weaken when investors believe the U.S. economy is slowing down and being outperformed by other economies, as is the case today. When those closest to the president (i.e., the American people) think he’s making a mess of things, it could well cause the currency’s stature to suffer abroad. Deeply unpopular presidents like President Bush get that way because the public develops misgivings about their competency to handle big issues. “You feel better as a global investor if there’s a strong president, because he’s more capable of crisis management and making good long-term policy,” Gallagher said.

What about the reverse? Is it possible that the weaker dollar causes lower presidential-approval ratings? The case for that is considerably feebler. In theory, a declining dollar would make imports more expensive, thus making American consumers feel poorer. In their reduced straits, they might take out their anger at the president. But a huge and growing chunk of imports originate in China, which has pegged its currency tightly to the dollar in recent years. The dollar today may buy fewer BMWs and Prada shoes than it did in 2002, but it buys about the same amount of Chinese-made microwaves, T-shirts, and toys. And yes, Americans who suddenly find travel to Europe prohibitively expensive might be expected to come home enraged. But most of these travelers already hated Bush. An August 2004 poll showed that voters with passports preferred John Kerry to Bush by a whopping 23-point margin.

So, the dollar and President Bush remain shackled together. Neither shows signs of reversing the longstanding downward trend. Given the global interest-rate climate—the U.S. Federal Reserve’s next move will most likely be to cut interest rates if the economy continues to flag, while the rest of the world is still going full steam ahead—the forces driving down the dollar are strong. As for Bush, he continues to plumb new depths of unpopularity, and the news flow—on Iraq, on the domestic economy, on the scandal front—isn’t getting any better.

In my neck of the woods, the heartland of Bushenfreude, new bumper stickers have begun to appear on the Audis, Volvos, and Priuses driven by liberal-leaning financial-services professionals: “1.20.09.” The message: Things will get better when the Bush administration ends, regardless of who the successor is. Or maybe they’re just predicting when the next bull market for the dollar will begin.