Focus Shifts to the Fiscal Cliff

With the U.S. presidential election now behind us, the big focus of the financial markets will be the fiscal cliff. President Obama has seven weeks to lead Congress to a bipartisan deal to reduce the budget deficit and avoid driving the U.S. economy back into recession. Investors are nervous that a deal can't be reached and have expressed their concern by reducing risk. This has been extremely positive for the U.S. dollar because many investors funded their high risk pro-growth positions by selling the low yielding U.S. dollar and Japanese Yen. To cut back on these positions, they have bought back dollars and yen and these currencies have been driven higher because other investors who may not be holding risky positions are also seeking shelter in the dollar and the Yen. So while the fiscal cliff poses a major risk for the U.S. economy, it has been good for the dollar.

The fiscal cliff is a big deal because the Bush-era tax cuts and mandatory discretionary programs are set to expire at this end of the year. If they are not extended, Americans will be hit with hefty tax increases and reduction in government spending that could shave as much as 4% off the gross domestic product (GDP). This will plunge the U.S. economy back into recession and cause growth to contract as much as 3% in the first half of next year....244 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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