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The Payroll Tax Debate and the Dollar

US Capitol Building
US Capitol Building

Congress is battling over whether to extend the payroll tax cuts passed last year. Here's how to use currencies to trade the debate.

Another day, another bruising battle between Congressional Democrats and Republicans. The fight du jour is how and whether to extend the payroll tax cut, and Steven Englander, head of G10 currency strategy at Citigroup, says the back and forth could affect the dollar.

"Failure to reach a compromise extending the payroll tax cut would presumably be a risk-off outcome that would lift the USD," he wrote in a note to clients. If Republicans have their way, and a corporate dividend repatriation proposal passes, Englander says that would lift the dollar as well. If the payroll tax cut is extended and dividend repatriation does not pass, he says that would be dollar negative.

How do you trade on the debate? In the very near term, you don't, says Englander - "but in the week before Christmas it may begin to drive FX." So keep an eye on the payroll tax battle. If anything is certain here, it's that this Congress loves to push right smack up against its deadlines.

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Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.

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