Twist Over the Cliff the Grieving Greenback

Although the current EUR/USD ascent hardly answers the description of a tidal wave, rather resembling a higher-than-usual bear jump, the block currency did climb above the 1.3200 mark in the pair, at the time of this review holding at 1.3244. This trend, however, is less due to the long-awaited (and not as yet really forthcoming, despite the significantly improved performance of European stocks) miraculous deliverance of the Old World economies than to the Federal Reserve QE4 announcement a week ago that has effectively backstabbed the quote currency and the U.S. Fiscal Cliff deadlock, which is not helping either.

Just to recapitulate, the Fed committed itself to hold interest rates practically down to zero until the U.S. unemployment rate falls to 6.5%. This comes in addition to the new bond purchase program targeted at $45 billion monthly on top of the existing "Operation Twist" that amounts to $40 billion per month Treasury acquisitions in mortgage-backed bonds. As the assets to fund the more-than-doubled bond-buying effort must come from somewhere, the Federal Reserve will simply print more greenbacks, thus further inflating its balance sheet of $2.8 trillion.

The second problem for the USD is the uncertainty as to the future of the U.S. Fiscal Cliff deal that everyone hopes to materialize before the end of the year. President Obama is having a hard time to convince the Republican opposition to accept his proposal of maintaining tax cuts for households with less than $400,000 income, encountering the adamant stance in favor of tax cuts to all households earning less than $1 million. If no compromise is reached by December 31, the largest economy of the world will be hit by skyrocketing taxation and is likely to plunge into recession at least during the first quarter of 2013.

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