World market up but future is in doubt

WORLD stock markets rallied yesterday afternoon as President George W Bush moved towards victory in the US presidential election.

On Wall Street the Dow Jones was up 1.5% while the Nasdaq leapt 1.6% following news Senator John Kerry had conceded defeat.

How long the trend remains is a wide open debate.

Traditionally in the run up to US elections the economy tends to do well and the markets respond.

To a limited degree this has been true in the case of the Bush administration.

Some say it will not last and the massive twin deficits will undermine the dollar and herald in a period of economic weakness that will keep markets pretty tame.

So said Niall Dunne, economist, Ulster Bank Markets.

Even on the day of the Bush victory the euro regained ground against the US dollar in the afternoon. It had stood at just over $1.27 earlier as investors appeared confident George W Bush had secured a re-election victory. By yesterday afternoon the euro moved above $1.28, with analysts saying attention was moving back to worries about the US economy.

That has been Mr Dunne’s contention for some time.

Other economists think also the huge deficits will undermine confidence in the dollar going forward.

Many analysts perceive a period ongoing weakness for the life of the new administration.

It is forgotten the Bush camp took a decision a year into his presidency to allow the dollar to weaken in order to keep the economy strong.

With the deficits piling up and high debt due to the Iraq war adding major burdens of the world’s biggest economy many analysts argue the only way the dollar can go is down.

Higher interest rates will start to undermine the economy too and the dollar is destined to remain weak.

One forecaster said by end 2005 the dollar will have fallen to $1.32 to the euro.

It is not a huge shift from levels but people forget three years ago the euro would buy just $0.88 cent.

That situation was also untenable, but few imagined the rally the euro was to make.

This is ironic given the US is still the engine to global economic growth.

But yesterday’s gains will be short-lived, the markets this side of the Atlantic believe.

In the short term, markets expect US stocks to ride on the crest of the Bush re-election result.

They will also take the view the tax breaks initiated by Bush will impact growth, but only in the short term.

Some analyst argued even if Kerry won the US economy faced very stiff challenges that have become increasingly worrying in the past 12 months.

Lack of resolution on the Iraq war, which could cost the US $100 billion next year, and the lack of budgetary control suggests either man would struggle in the period ahead, experts said.