Presidential Approval Ratings and the Dollar

Barron’s produced a graph showing President Bush’s approval rating and the movement in the dollar. It inferred that the low ratings may explain the decline in the dollar. However, a closer inspection suggests that there may not be a strong story. Correlation does not imply causality. In fact, the Bush approval ratings in 2007 have been relatively stable even with the dollar showing new lows. See Roper Center website http://137.99.36.203/CFIDE/roper/presidential/webroot/presidential_rating.cfm.

Most presidents have seen large swings in approval. While the negative ratings for Bush are significant, they are not unprecedented. Look at the ratings of Truman. What was extraordinary was the huge positive jump after 9/11. Only in crisis situations do you see these gains.

The decline in Bush’s rating has been on a downtrend since its high in the month after 9/11. Swings in the dollar since 9/11 do not seem to have matched the one direction downward spiral in his presidential approval ratings. A longer history of presidential approval ratings shows large swings in ratings which have often not closely followed dollar moves. Extrapolating this hypothesis to other countries does not seem to work. Tony Blair’s sinking approval ratings saw an appreciation of the pound.

The falling approval rating may be a proxy for a general decline in the belief that the United States is a safe haven for investments. A close look shows that the dollar peak came in September 2001. The security threat to the US may be the proximate cause of the decline.

Presidential approval ratings may also be symptomatic of other fiscal factors which have may be more important to the dollar. For example, the Iraq War has to be financed. Any lengthening of the war will cause a potential strain on the dollar. While this has proven to be true in the long-run, the Federal deficit has not been as poor as expected given the expense of the war. Nevertheless, the fiscal impact on asset prices can be significant albeit hard to measure.

Simple graphs can be dangerous without careful review.