A Republican tsunami will be bullish for the dollar. The bigger the GOP landslide, the better it will be for the greenback.
However, QE2 new-dollar creation will be bearish for the dollar. And the Fed’s money-creating will outweigh — at least in the shorter term — any Republican fiscal-policy improvements toward lower spending and taxing.
The GOP needs a King Dollar policy, preferably one backed by gold. A depreciating dollar will drain cash from the U.S. and send it overseas; foreign investment into the U.S. will be stunted by a chronically weak dollar. And the inflationary consequences of the devaluing dollar will ultimately outweigh any low-tax-rate incentives.
As the dollar kept falling during the Bush years, it blunted the pro-growth effects of the 2003 tax cuts. There is a crucial lesson to be learned here: A strong and stable dollar is an essential complement to low tax rates.
Regarding Team Obama, it now appears that Tim Geithner’s protest that no country can devalue its way into prosperity was a lot of smoke-blowing. His credibility is going to suffer.
But in a new Republican House (and maybe Senate), committee chairs will have a great opportunity to work on a King Dollar policy.
As I said, a stable and reliable dollar is an essential complement to low tax rates on the path to restoring growth.