Christopher Adams

The Business Herald’s markets and banking reporter.

Obama facing tough calls

US fiscal position unsustainable with action needed on taxes and spending economist.

Newly re-elected US President Barack Obama faces some tough decisions in the coming year and any lack of economic leadership will weigh heavily on the greenback, further strengthening the Kiwi dollar against the US currency, says ANZ chief economist Cameron Bagrie.

Traders say one of the most pressing issues facing America is the looming "fiscal cliff" - a combination of higher taxes and government spending cuts that will automatically takes effect unless Congress acts by January 1. The total impact next year could be as high as US$800 billion ($965 billion).

"[Obama] has a clear economic challenge," Bagrie said.

"The US fiscal position on its current trajectory is unsustainable and they're going to have to make some hard decisions in 2013 - it's going to involve taxes and its going to involve spending - and if they don't make those hard decisions they will get another credit rating downgrade."

He said US fiscal strategy would be "a bellwether" for what happens to the greenback.

"If we don't see economic leadership out of the United States ... then the US dollar is going to come under more pressure and that could keep the New Zealand dollar more elevated [against the greenback] than is required," Bagrie said.

The US dollar fell against 15 of its 16 main peers immediately after last night's election result became clear.

The kiwi was trading at around US82.79c against the greenback at 6pm.

"Monetary policy will remain loose under Obama so the [US] dollar will be sold," said Michiyoshi Kato, senior vice-president of foreign currency sales at Mizuho Corporate Bank.

The NZX-50 index closed up 0.39 per cent, while markets across Asia fell in the lead-up to the election result.

James Smalley, a client adviser at sharebrokers Hamilton Hindin Greene, said he did not expect the NZX to react strongly to the election result today.

"We're back to the status quo really," he said. "The market will probably forget about the election pretty quickly and look at US data."

Massey University senior lecturer in finance Jeff Stangl, whose specialist area is investment cycles, said regardless of who won the election US equities would "bounce" today.

"Particularly since it has been a close election there will be a short-term bounce," Stangl said.

But his research had shown that whether the President was Republican or Democrat it had little impact on markets over the long term.

"The bigger issue is how we deal with this looming fiscal cliff," Stangl said.

NZUS Council executive director Stephen Jacobi said Obama's re-election would bolster the negotiations towards the Trans-Pacific Partnership. "I think we're going to see some new energy from the President," he said.

- additional reporting agencies

- NZ Herald

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