Why the Fiscal Cliff Could Be Good for the US Dollar

12/14/2012 11:30 am EST


Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

While the fiscal cliff could spell disaster for the US economy and stock market, Kathy Lien explains why things might be different for the US dollar.

I’m here with Kathy Lien and we’re talking about the fiscal cliff and what it means for the US dollar.  There’s big news coming into 2013 for the U.S. economy with this fiscal cliff negotiations.  What does it mean for the dollar?

Well, normally Rob, you would think given how much trouble the US economy is in. Given the results of the fiscal cliff, which is a possible recession for the US economy, that the fiscal cliff and falling off the cliff should be banished for the US dollar, but it may not be.  There’s a very good chance that it actually can be positive for the US dollar.

Are we talking about like a safe haven type of a situation.

Exactly.  I think a really good parallel is August 2011 when the US was downgraded by S&P.  Everyone thought the world was going to come to an end.  They thought everyone would bail out of the U.S. dollar.

I still remember where I was.

Guess what happens?

That day and that time.

Where were you? At a coffee shop?

I was sitting in my bedroom, and I was short the dollar.

Because everyone thought that it would be the end of the world. But what ended up happening is it ended up moving into a period of very strong dollar strength and that lasted for the next month and a half or so because people turned to the dollar for safe haven.  The stocks responded first and they fell aggressively.

Then people moved safety of US dollars, so I think it’s a really good parallel for what can happen this time around and that is, if we do have the fiscal cliff, yes it would be terrible for the US economy, but it would also be terrible for US stocks.  The main theme will be risk aversion once again.  Even though the US economy is in trouble, there is still no asset seen as safe as US Treasuries, so I think that that’s going to trap quite a bit of demand and that’s probably going to lead to more dollar strength than weakness.

That’s a great word of caution when making assumptions about the fiscal cliff and the US dollar. 

Related Articles on CURRENCIES