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MENAFN - Arab News - 29/11/2012

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(MENAFN - Arab News) Investors may again have to look to the depth and liquidity offered by the US dollar as the US edges closer to the prospect of spending cuts and tax hikes.

As it stands, some 600 billion worth of tax increases and spending reductions, including 109 billion in cuts to domestic and defense programs, will begin to kick in from Jan. 2, acting as a drag on US economic growth.

Yet the likelihood of talks on the so-called fiscal cliff being fraught between US President Barack Obama's Democrats and the Republican party, that has a majority in the House of Representatives, can only have increased in recent days.

Recent discussions between Obama and the Republican House Speaker John Boehner have been eclipsed by the president launching a public relations push this week to bolster support for his bid to raise taxes on wealthy Americans.

Such a bid for public backing by Obama will force the Republicans to become even more politically entrenched in their opposition to tax hikes.

US Senate Majority Leader, Democrat Harry Reid, said this week he was still optimistic lawmakers ultimately would reach a deal to avoid plunging off the fiscal cliff.

"I do not believe that the Republicans are going to allow us to go over the cliff," he said, putting the onus back on the Republican party to back down.

This is the same Harry Reid who enraged the Republicans on Nov 7 with his plans to try and change the Senate's filibuster rule to limit the ability of Republican senators to block the progress of legislation.

The more it seems that attempts to avoid the fiscal cliff are getting bogged down by partisan political differences, the more nervous investors should be.
Fiscal cliff worries might help explain the firming of the dollar and the yen against the euro since Monday despite the fact that the euro zone and the International Monetary Fund agreed a deal on Greece.

Whether or not the yen retains its strength given Japan's own economic problems remains to be seen.

But the attraction of the safe harbor of dollar-denominated assets should rise as signs of partisan divisions in Washington re-surface.

- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.


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