Since the re-election of US President Barack Obama, the dollar has traded in a tight range against the euro, between a high of 1.2662 and a low of 1.2876. However, there are indications that financial markets expect the US currency to appreciate in the near future, increasing speculation in the dollar.
According to Michael Kadouch, head of Sales Treasury and Trading, Union Bancaire Privée, UBP SA: “The re-election of President Obama with a Democratic Senate and a Republican House of Representatives leaves the [political] situation in the US unchanged [for now].” Democrats and Republicans, who have so far been deadlocked, have to agree on long-term federal deficit reduction plan. Unless an agreement is found before the December 31 mandatory spending cuts and tax hikes kick-in, which will likely send the US into recession. But, for now, both sides have been sounding conciliatory, making investors bullish on the chances of a deal – and the dollar.
But, it is also very likely that the US Federal Reserve Bank will keep interest rates low in the coming years and continue its quantitative easing programme, which might prove to be a drag on the dollar.
From now to year end, Kadouch says “we should expect investors to be bothered by the [danger of a] US fiscal cliff induced recession, the fragile European situation putting pressure on the global economy and the recent military conflict escalation in the Middle East.”
What to do?
In the short term, Kadouch says: “We do not expect any news on the cliff negotiations nor on Europe and recommend holding dollars as a hedge against an adverse outcome. [In case of bad news] the dollar might retest the 1.2600 area.”