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FX VOICE: What the US fiscal agreement means for the dollar

An agreement has been made to avert the US fiscal cliff, but are the political measures sensible and what does it mean for the US dollar? CT asks the experts.
FX VOICE: What the US fiscal agreement means for the dollar

Brian Kim and Brian Daingerfield, FX strategists, Royal Bank of Scotland:
The US fiscal cliff deal provided a short-term risk-positive reaction, but significant uncertainty remains since there will likely be some fiscal-related drag on the US economy in early 2013.

The US will hit the debt ceiling by late February/early March and negotiations over raising the ceiling are likely to be contentious as Republicans may demand further spending cuts, as in 2011. We think the debt ceiling negotiations could create uncertainty across asset classes and reduce risk-seeking sentiment as failure to raise the ceiling could result in a US default. Even if the negotiations are successful, any new fiscal plans will be scrutinised by the ratings agencies, which could keep the threat of yet another US sovereign credit rating downgrade possible.

Throughout this, we think the US dollar will remain supported as a safe-haven despite concerns of ratings actions. The dollar will also likely remain favoured as notable economic headwinds, such as housing, appear to have receded. Indeed, the US economy is likely to be on firmer ground now than at any previous point in the current recovery, which could help the US weather the fiscal-related drag from the recent cliff deal and make the US relatively more favourable versus its larger G10 counterparts.

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