A deal between Congressional combatants to re-open the federal government and avoid default is going to be a short term boost to the dollar. Even though default was mostly discounted as being not something anyone would allow it has made some investors nervous.
But longer termany deal on the table to authorize spending through to the new year and raising the debt limit for a limited time does almost nothing but stall some tough decisions. What is the guarantee that even extra time for negotiation will force the two sides to actually reach a deal and resolve the fiscal issues that face the world’s largest economy?
It appears that both Democrats and Republicans will support spending cuts. Obamacare will probably not even be discussed in ongoing talks. The differences lie in the vision for taxation.
In the end the White House and Congress have been taken away from more immediate issues and the can has been kicked further down the road and there will be no long term fix in the new year.
The dollar will suffer in daily trading because the Federal Reserve will have to take into account that negotiations could again be acrimonious and cost the economy, which will leave the central bank keeping monetary policy loose and possibly cause more delay in tapering stimulus.
Estimates are that each week of the current U.S. government shutdown costs between 0.1 and 0.3 percent in economic growth. That should comfort no one, nor the fact that this scenario will be repeated in a matter of months no matter what happens in the next few days.