Dollar edges higher as U.S. fiscal talks eyed; yen drops
Volatility could increase as the year-end deadline on the U.S. “fiscal cliff” approaches with little progress on reaching a deal to avoid $600 billion in tax hikes and spending cuts that could tip the U.S. economy back into recession.
A deal in the coming days could spark a rally in currencies like the euro, the Australian and Canadian dollars as investor appetite for risk increases, while no deal may spur demand for the safe-haven U.S. dollar and Japanese yen, analysts said.
“The end of the week therefore sets up as possible volatility event for the market with some analysts expecting a 1 percent rally for risk FX if a deal looks to be done, but a possible severe selloff of 2 percent or more if it fails to materialize,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
“The risks are skewed to the downside as market remains complacent about a compromise, but for now traders are betting that a deal gets done.”
Many investors opted to stay on the sidelines in thin pre-holiday trading on Monday, awaiting headlines from Washington.
The Democratic president and Republican House of Representatives Speaker John Boehner, the two key negotiators, are not talking and are out of town for the Christmas holidays. Congress is in recess, and will have only a few days next week to act before January 1. Some lawmakers voiced concern that the country would go over the “cliff”. Read More