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Why the Dollar Is a 'Fiscal Cliff' Hanger-On

Mark Ralston | AFP | Getty Images

Look up in the sky! It's a bird! It's a plane! It's the dollar!

Ever since last week's election, the dollar has been a "Supercurrency" as investors, worried about the fiscal cliff, seek refuge in safe havens.

But whether that can continue is unclear.

Marc Chandler, chief currency strategist at Brown Brothers Harriman, is bullish on the dollar n the face of the looming tax hikes and spending cuts known as the fiscal cliff. "The US goes over the cliff—safe haven," he told me. Even if the U.S. is hit with a credit-rating cut, that would be unlikely to dent the dollar, he says, noting that the dollar rose when the U.S. suffered a credit rating cut in 2011. And if the fiscal cliff is averted, "growth differentials (mediated by interest rate differentials) should be dollar positive."

(Read more: What Is the Fiscal Cliff? CNBC Explains)

Steven Englander, head of global G10 FX strategy at Citigroup, also sees dollar strength continuing. "The USD gains on fiscal cliff concerns because US equity markets are the major driver of global equity markets and a major shock to the US economy will affect all others. So it is a double global risk-off shock and the USD paradoxically gains as a safe haven (second only to JPY)," he told me. "This would turn around if global asset markets or economies prove more resilient, but it would take at least 6-12 months for the impact to dissipate and the USD to face downward pressures, given how weak activity is elsewhere."

David Bloom, head of foreign exchange strategy at HSBC, points out that "the concept of the USD behaving as a safe haven is well and truly embedded in the psyche of the market" - but the idea that dollar buying makes sense in the face of the fiscal cliff is problematic."The idea of buying the USD into a US problem is fraught with contradictions," he told me. So Bloom recommends that investors look for the right moment to capitalize on this cognitive dissonance.

"We have no doubt that a "risk-off" situation driven by the fiscal cliff will see the market buying the USD," he wrote in a note to clients. "One would have to be either brave or foolish to stand in front of this dissonant train. However, eventually the market will be unable to cling to this bizarre view and the USD will have to fall back down again."

Camilla Sutton, chief currency strategist at Scotiabank, is looking at market indicators to see if the dollar can sustain its current strength - and she is wary. The volatility index known as the VIX has not moved materially higher, she says, and that suggests there is unlikely to be a spike in volatility that would support a prolonged move into the safe-haven dollar. She expects the greenback to be a middling performer in 2013.

Brian Kelly of Shelter Harbor Capital is even more skeptical bout the dollar's prospects. He told CNBC that whether or not the fiscal cliff is resolved, the implications for the dollar are not good. If the country goes over the fiscal cliff, and significant tax hikes and spending cuts are implemented, Kelly thinks the Federal Reserve would be aggressive with monetary stimulus and that would be bad for the dollar. On the flip side, if Democrats and Republicans agree on a way to avoid the fiscal cliff, risk appetite would rise and draw investors out of the dollar.

Take your pick - and make your dollar trade.

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