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The Dollar and the Deficit Supercommittee

Thursday, 17 Nov 2011 | 11:24 AM ET
Holloway | Getty Images

One week. That's all the time the deficit supercommittee has to reach a deal, and so far it's not looking good. Both sides are talking tough, and a Citi Macro Trading survey of investors found that fewer than 20% think the committee can reach a deal that would avert mandatory cuts.

That said, Greg Anderson, senior FX strategist with Citigroup, thinks that view is overly pessimistic. He points out that the current Congress is extremely unpopular, and says looming elections could spur supercommittee members to compromise.

If that were to happen, Anderson told me, "I would expect the Australian dollar to be the biggest beneficiary in G10 space. In emerging markets, it would be the Mexican dollar. Moves of 2-3% in these currencies wouldn’t shock me if we got a surprise grand bargain," since trading is likely to be thin right before the Thanksgiving holiday.

In the meantime, though, "There is considerable two-way risk associated with the supercommittee events over the next week," he says.

The other question is what a failure to reach a deal would do to the dollar. Anderson argues that in the event of failure, "the dollar will rally 1-2% across the board" thanks to demand for safe havens, with the biggest moves likely against the euro and the Canadian dollar.

But Stewart Hall, senior fixed income and currency strategist at RBC Capital Markets, told me that in the absence of a deal, he thinks "we face revisiting the painful displays of partisan politics that weighed on the dollar in July and August, keeping the DXY pinned near to the lows over that period."

Really, either view has logic behind it. Too bad the supercommittee members can't see their debate that way.

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