Those guys at the White House are currently debating over this issue right now. What is the possible outcome and what will it mean for USD?
This is what I read about Fiscal Cliff…
The Fiscal Cliff Explained
“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs - including the defense budget and Medicare are in line for “deep, automatic cuts.”
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Can a Compromise be Reached?
The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. There’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3, after the deadline.
The most likely outcome is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. Still, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.
Possible Effects of the Fiscal Cliff
If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.
The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP before 2012 is even over.
Having said this, it’s important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes - while destructive over a full year - will be gradual at first. What’s more, Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won’t necessarily be an impediment to growth even if Congress doesn’t address the issue until after 2013 has already begun.
The Next Crisis
Unfortunately, the fiscal cliff isn’t the only problem facing the United States right now. At some point in the first quarter, the country will again hit the “debt ceiling” - the same issue that roiled the markets in the summer of 2011 and prompted the automatic spending cuts that make up a portion of the fiscal cliff.
Author: Thomas Kenny, Bonds Guide. wwww.about.com
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So, the Fiscal Cliff means for USD is Large Sell off. EUR/USD move Higher. (IMO) lol… 
Correct me If I wrong. No idea about fundamentals… 
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If I’m not wrong, we should expect USD to lose some of it’s value through 2013.
Didn’t loose the USD value almost right from the moment you could start trading the EUR…
With having the most behind us about the financial crisis, I expect the Eur will be in favor again. It was not like the US did so great that the USD rose, it was the trouble in the Eurozone that made the Euro decrease. And the US had to invest >7.000.000.000.000 USD to have the USD at the level it is now. I guess you know by now that I am not from the US.
OK, but what concerns me is that it seems that both economies will struggle through 2013. Did you read Draghi’s speech?
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
-Mark Twain.
No haven’t read it. It just tells what they want you to know. I am sure that there is a road to recovery that needs to be taken, but the optimism will start on our way back, not when we finally reached our destination. So I don’t mind if it goes down further as that will make our way back only longer and more prosperous… But I am only interested in the rates now. For all people in distress, I hope the end is near and we can recover again.
What surprised me is the moves around European news. Perhaps I view it from a European point of view, but there wasn’t s shred of for me that the countries would be saved. So i was surprised by the big moves and drops. Maybe the EUR lost most due to bad marketing. The leaders not been to convince the investors that all would be done.
Damn, I am already so far that I don’t even belief that fundamentals influence the rates, but the sentiment on the market…
Is the Worst Over for the Euro Zone? | Forex Blog: Piponomics
Forex Gump seem to agree with me on Europe…
Good. Thanks.
BTW, I’m 99.99% sure that USA will find solution to avoid new recession.
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
-Mark Twain.
I see recovery at horizon. S&P have increased Greece’s credit rating. German economy outlook is very good too. And about USA…I think that US economy will have very hard year.
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
-Mark Twain.
Failure of Plan B this Asian session…
I was already on a sell of position this morning at 1.3268 because I was expecting a re tracement from yesterday or so.I hope you guys catch some pips That was a good sell off on EUR/USD. It might go down some more at LO …will see… but I already bag those pips :)…
Just eying on if the move continues…
I’m short also gave me a smile lol. Congress is done until after Xmas.
I was long yesterday, and I’m flat today.
And I’m glad for you two. Happy trading.
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
-Mark Twain.
Nice :)…Here I am I thought I was done for the year but nope…and I like it…My best month ever…so far.
Flat is better than losing (I think)… I’m sure you will catch something one of this days. Hang in there…
I’ll correct you since you’re wrong… USD will strengthen long term because the effect of a US recession impacts the entire planet, most especially Europe.
Still, I took some pips. I saw great opportunity on crude oil and CAC40 index, so I just had to jump in. Couldn’t resist.
Later…
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”
-Mark Twain.
If they approve the measures then I think Risk-On Theme should continue at least medium term. If no deal then USD could rally around 2%. “Just my 2 cents”
From what I’ve seen in my two years of trading stocks and forex is that 95% of peoples assumptions and predictions are wrong. Seeing everyone write that the euro will strengthen is likely to be incorrect.