As we approach the next U.S. presidential election, one strategist is warning politics, not economics will play a major role in determining how the dollar trades in 2012.
“It is now clear to the markets that the current U.S. political state of affairs will not produce a deficit reduction plan that is sufficient to get the U.S. on a path to fiscal sustainability” said HSBC’s David Bloom in a research note.
“This impasse is very worrying. It is still not inconceivable the U.S. will lose its AAA rating, even if it is for a short time. Any further stimulus to the economy will have to come from monetary policy as all fiscal routes now seem to be closed and this cannot be good for the dollar ,” said Bloom, who is the Global Head of Foreign Exchange Strategy at HSBC.
Following weeks of bitter discussion in Washington on raising the debt ceiling, Bloom said it was clear that winning the White House in 2012 was now the major concern of all those in Washington.
“Recent events have highlighted that to some extent politics is the new economics. So, although the election is still over a year away, the political posturing of the Republicans and Democrats will be a key influence on the dollar over the coming quarters,” he said.
With the deficit so high, Bloom said the U.S. is way behind the euro zone and U.K. in addressing runaway borrowing.
“The government is currently borrowing 40 cents for every dollar spentand is abusing its reserve currency status,” he said. “If the debt ceiling dispute is anything to go by, the political climate in the U.S. and the lack of a consensus plan on how put the U.S. on a sustainable fiscal path does not bode well for the dollar or financial markets in the run up to the 2012 elections.”