This year's presidential election in the U.S. is probably the most important in years, not only for the U.S. economy but also for the dollar.
The outcome on Nov. 6 will dictate who will be in the White House for the next four years, how much power he will have to resolve the country's immediate and long-term fiscal problems and whether the U.S. will lose the key triple-A rating that has made the dollar a safe haven for many years.
The market's focus on the election will be even more intense as it comes as the economy continues to struggle out of recession, after a couple of previous false starts, and as a way to prevent the reversal of previous tax cuts due to take place on January 2, 2013--the so-called fiscal cliff--has yet to be found.
Now, it is all in the hands of the U.S. electorate.
The problem for financial markets is that the election is becoming too close to call, with the latest polls showing the Democrat incumbent Barack Obama neck and neck with his Republican opponent Mitt Romney.
This in itself is starting to pose a threat to current market stability, especially if the final vote is too close to allow an immediate declaration and negotiations on the fiscal cliff have to be delayed even further.
As President Obama's previous attempts to resolve the issue with a Republican-led House of Representatives have shown over the last year, the issue is highly divisive and unlikely to lend itself to a quick resolution.
For financial markets, and the U.S. economy, probably the best near-term solution would be either a clear victory for Mr. Romney, keeping the House with him, or a clear victory for President Obama. In either case, that would probably mean at least a short-term extension of the existing tax cuts while negotiations on a longer-term solution take place.
But given the state of current polls, other, more messy, results are more likely. President Obama could be returned to the White House, retaining the status quo of a Democrat majority in the Senate and a Republican majority in the House. Or, he could lose the Senate as well and face an even more implacable task trying to reduce the tax cuts for the very rich.
Similarly, a close result with Mr. Romney in the White House but no backing in the Senate would reduce the chances of swift progress.
Whichever, the chances of a tax-cut extension will be considerably smaller and the U.S. economy could find itself falling over the infamous fiscal cliff.
A protracted stand-off between the White House and Congress would not only introduce fresh uncertainty to financial markets but bring new fiscal tightening to a U.S. economy that is already very fragile.
How this affects the dollar could prove difficult to predict. For much of this year as the global, and U.S., economies have stumbled, the dollar has remained relatively firm as investors have preferred safe havens.
But the dollar's role as one of these havens could well come under threat if the political uncertainty in Washington continues to threaten the U.S. recovery and if concern about the country's longer-term ability to deal with its gigantic deficits starts to undermine investor confidence.
Rumors once again surfaced this week that Fitch would remove the country's triple-A credit rating, a move that could make U.S. assets less attractive than they appear now, although Fitch said its rating is unlikely to change before late 2013.
Hints of what could come were already evident in U.S. Treasurys, where an auction of seven-year paper this week proved the weakest since 2009.
And there's still more than a week to go until the election.
(This is an opinion column by Nicholas Hastings, who is a Senior Correspondent in London for Dow Jones Newswires and has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493, by email at nick.hastings@dowjones.com or on Twitter @NickHastingsDJ)
