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Dollar May Gain on Romney Victory as Austerity Reigns, Citi Says

The U.S. dollar will gain if Mitt Romney pulls off a “big surprise” and wins the presidential election tomorrow, or if the outcome remains uncertain in an echo of 2000, according to Citigroup Inc.

A victory by President Barack Obama is more expected by the market so a Romney upset would have a bigger impact, Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote to clients today. A Romney presidency would see Treasury yields rise and the yen weaken because the yield premium investors receive for buying dollar-based assets versus those denominated in the Japanese currency would increase. The Canadian dollar may also fall because the nation’s economy is sensitive to fiscal tightening in its largest trading partner.

“There could be this fear, especially in respect to the Federal Reserve that, come 2014, we’ll see a whole new complexion” with a Romney victory, Englander said in a telephone interview. “In the same way investors may have to be reassured that the pullback to fiscal austerity needs to be long-term, the pullback from monetary easing has to be gradual and long-term, as well.”

Currencies that would gain if Obama were to retain the White House would be the Canadian, Australian and New Zealand dollars and Norway’s krone, according to Englander, because the Fed will be encouraged to continue its monetary-stimulus programs. The dollar may also weaken as investors expect stability surrounding Chairman Ben S. Bernanke’s leadership at the Fed.

Fiscal Cliff

Romney has said he disagrees with the central bank’s measures to stimulate the economy and would replace Bernanke.

“We would see austerity both on the fiscal and monetary side -- commendable from an ideological viewpoint, but unlikely to inspire confidence in markets,” Englander said. “So we would lean to partial risk-off.”

If Republicans were to maintain or increase their majority in the House of Representatives, Englander wrote, it may lead to tougher negotiations surrounding so-called fiscal cliff, the collection of $607 billion in automatic tax increases and spending cuts scheduled to take effect at the beginning of 2013. That would support the dollar as investors buy Treasuries.

An uncertain outcome to the race, as in the 2000 contest in which a victor wasn’t declared until December, would be viewed as raising the odds of a Romney victory, he said.

“The dollar surge would reflect safe-haven flows in Treasuries, rather than any expectation that U.S. assets would outperform on a cyclical or structural basis,” Englander wrote.

Obama led Romney, 48 percent to 45 percent, in an Oct. 31-Nov. 3 national poll conducted by the Pew Research Center, a survey that was deadlocked at 47 percent a week ago.

Nationally, almost 30 million people have cast ballots, according to the United States Elections Project at George Mason University in Fairfax, Virginia. More than a third of the total electorate is expected to vote early.

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