USD and Fiscal cliff

[nitinbhala]

what will be the long term and short term effect of fiscal cliff on us dollar.

[JohnLeonard]

what will be the long term and short term effect of fiscal cliff on us dollar.

If sequestration is triggered then the short term affect will be market turmoil. There will be massive govt spending cuts (a good thing) along with massive tax increases (a bad thing). Another massive tax begins at the same time, Obamacare. The one-two punch of taxes and regulations will lead the nation back into recession. Long term, there will be a declining dollar.

If the fiscal cliff is avoided, the short term affect will be a steady to rising dollar for a few weeks because the news will proclaim it as averting certain disaster. Then reality will set in. Massive government spending will continue unabated, massive tax increases go into affect, another massive tax increase and set of gov't regulations (Obamacare) will go into effect and the nation will slip back into recession. Long term, there will be a declining dollar.

[nitinbhala]

thaks alot john

[bobmaninc]

John although you are right in the short term if we jump off the cliff it will be bullish for the dollar immediately after we take the plunge as it will create a risk off environment and everyone floods to the safe heaven of gold and the green back.

If we decide not to jump then it will be bearish for the dollar as it will create risk off.

This makes no sense to me at all but is something I have seen in trading all to often.

[rknigh2]

Bob is right.

The fiscal cliff is USD positive, especially if there is a dividend tax increase. Essentially a lot of investments are converted/sold back to cash (USD) which increases a huge demand for USD, therefore spiking the value of the USD as demand skyrockets.

My view is a bit contrary to John's analysis. Long term, increasing taxes and cutting spending should be USD positive also. If the US can responsibly cut their deficit, they increase the safety/confidence of the USD. On the other hand, if they continue to increase the deficit (by refusing tax increases and spending cuts), the US economy essentially becomes a very very bad risky investment (eventually they could default on tens of trillions of loans - no one wants to hold loans that the lender refuses to pay).

So, IMO I am short term and long term USD bull, whether they go over the cliff or not. The only scenario I go short the USD is if they essentially "kick the can further down the road", because that gives an opportunity for the debt bubble to continue to expand and USD will be spent on foreign investments.

[JohnLeonard]

John although you are right in the short term if we jump off the cliff it will be bullish for the dollar immediately after we take the plunge as it will create a risk off environment and everyone floods to the safe heaven of gold and the green back.

If we decide not to jump then it will be bearish for the dollar as it will create risk off.

This makes no sense to me at all but is something I have seen in trading all to often.

You are correct in stating that everyone will flock to gold as a safe haven. Gold, however, inversely correlates to the strength of the USD. When the USD rises, gold declines. When the USD declines, gold rises. By stating that everyone will flock to gold AND the USD as a safe haven... well, only one of your assumptions can be correct.

These are strange times we live in so, who knows? I guess we will find out in a few months!

Currency Correlation | OANDA fxTrade

[JohnLeonard]

Bob is right.

The fiscal cliff is USD positive, especially if there is a dividend tax increase. Essentially a lot of investments are converted/sold back to cash (USD) which increases a huge demand for USD, therefore spiking the value of the USD as demand skyrockets.

My view is a bit contrary to John's analysis. Long term, increasing taxes and cutting spending should be USD positive also. If the US can responsibly cut their deficit, they increase the safety/confidence of the USD. On the other hand, if they continue to increase the deficit (by refusing tax increases and spending cuts), the US economy essentially becomes a very very bad risky investment (eventually they could default on tens of trillions of loans - no one wants to hold loans that the lender refuses to pay).

So, IMO I am short term and long term USD bull, whether they go over the cliff or not. The only scenario I go short the USD is if they essentially "kick the can further down the road", because that gives an opportunity for the debt bubble to continue to expand and USD will be spent on foreign investments.

I agree that jumping off the cliff is the better of the two options because it has at least one positive feature -- massive spending cuts. It also has a few other features such large tax increases on top of the addtional tax increases that are scheduled. When was the last time large tax increases were levied upon America's "most wealthy" during a period of economic stagnation? Long before any of us were born. Herbert Hoover was the last President that attempted it. The results weren't too good.

I am long term bearish on the USD, no matter what happens -- unless the EU somehow flubs it all up worse than the U.S.,which is possible. Then the USD increases in value do to relativity, not fiscal policy.

[Mikepip1]

President Obama will have his hands full dealing with this dilemma. If he allows the legislation to come into effect, he risks a US economic recession. If he manages a compromise and postpones the legislation, the US will face challenges reducing their USD1.1 trillion federal budget deficit.

In my opinion, a compromise will be reached but it will be like kicking the can down the road. Nothing will be solved and they will face the same problem in due time.

The market might have the same perception knowing that underlying problems of mounting debt, weak employment growth and a stubbornly high unemployment rate are the main worries infecting the US economy.

On top of that, we still have the ongoing Euro Zone debt crisis, so optimism is in short supply. Moving forward, I doubt there would be much “risk on” sentiment in the market. That means safe haven currencies like the USD, JPY and CHF will be in demand. Thus USD may strengthen relative to other risk currencies in the short term but in the long term I reckon USD will devalue further as the Federal Reserve continues with its QE Infinity policy.