MW: Dollar gains as canceled vote sparks cliff fears
By William L. Watts and Sarah Turner, MarketWatch
FRANKFURT (MarketWatch) — The dollar gained on Friday after House Republican leaders failed to muster sufficient support within their own caucus to pass a bill that would have raised taxes on top earners, sparking fears U.S. politicians won’t be able to avoid the fiscal cliff.
“The fiscal cliff is a real threat not just for U.S. growth next year, but for the outlook for global growth. As a consequence, safe-haven assets are likely to perform well on the back of last night’s news,” said Jane Foley, senior currency strategist at Rabobank International in London. See The Tell: How deep is the cliff dive for stocks?
The ICE dollar index DXY +0.15% , which measures the greenback against a basket of six rivals, traded at 79.413 in recent action compared with 79.239 in late North American trading on Thursday.
U.S. stock futures slumped after Republican leaders canceled the vote late Thursday, citing a lack of sufficient votes. Stock futures came off early lows, but continue to point to a sharply lower start for Wall Street. See: Stock futures slump after GOP abandons tax vote .
The bill, dubbed Plan B, would have extended Bush-era tax cuts on incomes below $1 million while keeping current rules on the estate tax; maintaining the 15% tax rate on capital gains and dividends for those making less than $1 million; and extending some expensing for small businesses, among other measures. Read: House Republicans cancel Plan B tax vote
While President Barack Obama, who has called for tax hikes on households earning more than $400,000 annually, had threatened to veto the bill, the legislation was seen as an effort by House Speaker John Boehner to increase his leverage. Failure to corral sufficient votes within his own party is seen as weakening Boehner’s hand and potentially narrowing the scope for a deal. There’s less than two weeks left before billions of automatic spending cuts and tax increases kick in.
“At present, the U.S. has no convincing deficit-reduction scheme in place and the fiscal cliff negotiations have highlighted the huge impasse between Democrats, who are reluctant to cut spending, and Republican who are averse to raising taxes,” Foley said, noting that even if passed, Plan B measures would only have softened the impact of the fiscal cliff.
Tim Waterer, senior trader at CMC Markets, said that “higher-yielding currencies gave up ground to the safe-haven U.S. dollar with the latest setback on the [fiscal-cliff] talks.”
The euro EURUSD -0.3159% slipped to $1.3202 from $1.3246 in late trading the previous session.
The British pound GBPUSD -0.3291% declined to $1.6222 from $1.6281, while the Australian dollar AUDUSD -0.5429% declined to $1.0434 from $1.0486 in late North American trading on Thursday.
Against the Japanese yen USDJPY -0.4477% , which investors also tend to view as a relatively safe currency, the dollar declined to 84.08 yen from ÂĄ84.43 in late trading on Thursday. The dollar gained sharply against the yen this week, reaching a fresh April 2011 high on Thursday after the Bank of Japan expanded its quantitative-easing program, as expected.
Bank of Japan Gov. Masaaki Shirakawa also indicated that the bank’s inflation goal will be reviewed at its Jan. 21-22 policy meeting. Read: Bank of Japan eases further, sees uncertainty .
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Follow him on Twitter @wlwatts.
Sarah Turner is MarketWatch's bureau chief in Sydney. Follow her on Twitter @SarahTurnerMKTW.
