Why the Dollar Won't Fall Off a Cliff

Why the Dollar Won't Fall Off a Cliff

The dollar has gotten a boost from investors' obsession with the fiscal cliff negotiations. But if you think it's going to sag if Democrats and Republicans can make a deal, you've got another thing coming.

"While some fiscal cliff associated drag could pare back early 2013 growth momentum, we remain constructive on the relative economic prospects of the US, which we believe could remain supportive to the USD in the medium-term," say Brian Kim and Brian Daingerfield, currency strategists at the Royal Bank of Scotland. (Read more: What Is the Fiscal Cliff? CNBC Explains)

These pros point to improving data on employment and housing to argue that "the US economy is on more stable ground now than at any point in the crisis."

One possible snag is the coming expiration of the Federal Reserve's Operation Twist. But even so, the strategists say, "we still look for the USD to remain favored as a safe-haven into year-end and for the relative US economic advantage to buffer any fiscal cliff-related drag and to act as a USD support in 2013." They think the dollar could reach 88.00 against the yen by the end of the first quarter of next year.

RBS strategists are also bullish on other North American currencies. Brian Kim thinks a relatively smooth resolution of the fiscal cliff impasse could be good for the Canadian dollar, and Flavia Cattan-Naslausky and Felipe Hernandez argue that the Mexican peso is also well positioned.

"Mexico is in a sweet spot underscored by a new government without the wear and tear of the PAN, comparatively stronger growth on competitive labor costs and FX, the ability (and hopefully willingness) to show policy flexibility in the latter stages of the global economic cycle, and stronger structural base underpinning a more resilient medium to longer term currency," they wrote in a note to clients. "We remain bullish medium-term MXN."


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