Dollar Could Fall Off Fiscal Cliff Into Euro Abyss

As the fiscal cliff approaches the United States and the euro crisis drags down global growth , central banks across the have been delivering more and more stimulus. The problem, to David Bloom, head of global foreign exchange strategy HSBC, is that central are having less and less impact the global economy.

“The remarkable aspect of this spate easing and expected easing that it feels rather underwhelming in of its perceived implications for the global economy,” said Bloom a research note.

“It has , it seems, fostered any degree of optimism regarding future economic growth. Perhaps it is simply early to see such a change in mood come ," he said.

One thing the central bankers achieved is a rise investor risk, appetite sending stocks higher their June low. They have boosting the risk-on brigade's favorite currency, Australian dollar, which has moved sharply higher the yen in particular. The question investors need to answer to Bloom is whether the stimulus will help revive growth simply signal that they stand ready as the buyer of last for risky assets.

“Part of the answer in whether quantitative easing (QE) remains potent. Academics have pored the effectiveness of non-conventional monetary policy and, inevitably, conclusions vary. But a cursory examination of the financial market reaction QE suggests a declining influence," Bloom said.

The Federal Reserve’s first round of QE saw S&P 500 rise by nearly a third, but the second round saw single digit gains. For the currency markets this debate determine whether the dollar, or the euro will finish the year the ascendancy, according Bloom.

“The weaker economic data is “risk off” and therefore good the dollar, but QE and its impact financial assets is “risk on” and bad for dollar, – this is creating a dollar standoff” said Bloom who notes disappointing data boosts the dollar but really disappointing data boosts greenback.

“Intriguing as this dynamic be, it is not sustainable. Policy responses may help underpin financial asset prices for a , but in the end they need reflect the economic fundamentals”," he said.

A day of reckoning is the way, according to Bloom, when we will see an improvement in the economy or a big fall asset prices.

“The risk the dollar is that we are on the cusp of a paradigm shift the FX market where the offsetting influences of weak economics and the QE response no hold sway," he said.


Adapted and abridged from: CNBC, July 13, 2012.