Markets and most taxpayers breathed a sigh of relief for a few days after the so-called fiscal cliff was averted but today focus turns to the U.S. debt ceiling.
On January 1st the United States Congress finally approved legislation, after months of gridlock, to avert $600 billion in immediate tax increases and spending cuts which risked tipping the U.S. economy back into a recession.
Risk assets gained after the news, surging on the first trading day of the new year. However on Thursday, we saw a reversal and the dollar gained strength due to safe haven demand as markets were cautious.
Focus shifted from the fiscal cliff to the debt ceiling. President Barack Obama and congressional Republicans face even bigger budget battles in the next two months
The dollar gained to its strongest level in three weeks against the euro on speculation U.S. policy makers will struggle to reach agreement on raising the U.S. debt limit.
Also boosting the dollar was a report released late in the U.S. trading session that showed minutes from the Federal Reserve’s latest policy meeting showed that officials felt bond buying would last at most until the end of 2013. Bond buying usually tends to weaken the currency, so the view that this measure will end soon had a positive effect on the dollar.