Could the fiscal cliff and China’s new leaders dent the dollar?

USA dollarOne cause of uncertainty hanging over the Forex markets has finally been resolved in the last few hours. The US electorate have now decided who will be in charge of the world’s largest economy for the next four years.

The dollar was gaining ground against the Euro and Sterling in the run up to polling, but saw a small retrace this morning on market expectations of further rounds of quantitative easing.

US businesses and investors are turning their attention more towards the looming ‘fiscal cliff’ and its potential impact on federal deficits and debt. The major credit ratings agencies are maintaining a negative outlook on US debt due to this, with the dollar’s ‘reserve currency’ status being one of the few planks still supporting its elevated rating. If no settlement is forthcoming, the US economy could be shocked into further recession, putting more pressure on the dollar.

The impending change of leadership in the world’s second largest economy, China, also creates potential opportunities – or threats – in the online currency markets. China’s retiring leadership have in the past tried by-passing the dollar for international settlements, and their successors have yet to declare any policy. President Obama’s re-election has averted the threat of Governor Romney’s hawkish stance towards China on trade and ‘currency manipulation’ disputes.

Xi Jinping is expected to take over as President at tomorrow’s Communist Party Congress in Beijing, and some China watchers detect sympathy towards reforms which could have an impact on future economic and trade policies.

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