The focus for now is all about when the Federal Reserve will begin to taper but medium-term FX investors also need to keep one eye on the imminent Congressional budget battles.
There are two things that the Republicans and Democrats will need to agree on. The first is the annual budget by October 1 or the government shuts down. Then they need to raise the federal
debt ceiling by November.
Given the animosity between U.S. President Barack Obama and the Republican leadership expect negotiations to again go to the brink and then another few bandaids slapped on things until this round of politicians has left office and the problems pass to someone else. While the two sides went to the brink two years ago, when Republicans realized they were playing with a bad hand they grudgingly came to the table. So far, that looks like what they will do again even if they bag a few political points. The majority of this country does not care so much for the
Republican leadership whether they be Democrat or swing voters. Republican leaders do not want to get blamed given 2014 elections are getting ever closer.
The 2011 debt limit fight saw Republicans bruised when financial markets were battered as the U.S. looked like it could conceivably default on its obligations. The U.S. credit rating did take a hit. Obama was scathed but all he has to worry about now is his longer term legacy rather than winning another presidential term. The 2012 “fiscal cliff" fight over of tax hikes and budget cuts has already hurt growth with a series of automatic cuts but so far the U.S. economy is recovering.
What will it all mean for the dollar? Day to day volatility but probably not that much that is visible in the longer term. Though the economy may not grow as fast as it could have with
agreement by both sides and sound policies in place, it is growing. Financial markets may get concerned but probably only right as the deadlines approach. And if it all results in some financial austerity and fiscal responsibility, it may even be good for the dollar in the long run.