Dollar falls sharply on fiscal-cliff deal

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Yesterday the US fiscal cliff turmoil came closer to its end as the House of Representatives passed legislation for new tax increases, concerning wealthier citizens.

The Senate voted for a compromising solution as the bill passed mostly on the back of Democrats. In respond to the news the US dollar and Japanese yen declined as the euro met see-saw cost.

Yet, the passage of the legislation just gives way to a stage of new confrontations because the US budget issue goes further on with the deficit and economic policy. The truth is that legislated agreement only concerns the tax problems, while the White House and Senate Republicans have to make the more important compromise on spending cuts that will be reconsidered soon enough.

As we stepped into the New Year with the latest fiscal cliff news, the index which tracks the dollar against rival currencies dropped to reach 79.28. The measures against the automatic execution of the fiscal cliff caused strong effect on the US and other currencies level.

Although President Obama showed that he would not discuss the US debt ceiling and spending cuts, the Republicans think that this could aid them the cut government expenditure. The negotiations must continue further on as the weight is shifted on the outlays.

Meanwhile, as the first news of compromising deal came, it was almost certain that the dollar will fall immediately. The dollar as a safe haven currency often jumps in uncertain times and falls back as investors are showing signs of more risky decisions.

The development over the fiscal cliff issue, believed to put the US economy back into recession, quickly highlighted the appeal of currencies seen as riskier. One of these currencies is the debt-shaken euro. Today the euro showed great improvement, trading at $1.3267, up from the $1.3197 value, which opened the week.

The times of risk continue as Republicans are not pleased by the fact that the legislation concerns only taxes. They want to correct the bill as the spending cuts are added. If the negotiations don’t continue a $600bn automatic tax rises and spending cuts would take place, throwing the US economy back into recession. The legal borrowing limit of the US has reached the $16.4tn threshold and the Treasury will be able to support the national debt for approximately 2 month period.

Despite the dollar decline, the Japanese yen also seen as a safe currency fell even stronger. Wednesday the greenback gained to ¥87.17 hitting record value unseen the past 3 years.

Though the dollar index has some improvement we should focus our attention over its weakness. Yet, in longer term the US currency may gain ground as other issues came forward with the discussion of the US debt limit raising and the debt continuing debt crisis in Europe.

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