Budget deal reached in the US

Tom Tong12/Dec/2013Currency Updates

Late Tuesday, the Republican-controlled House of Representatives reached a budget agreement with the Senate, where the Democrats hold a slim edge.The agreement guarantees funding for the Federal Government through September 30, 2015 at 2013 levels. The Republicans clearly did not want a repeat of the debacle of last October, when the public largely blamed them for the impasse, their poll numbers plummeted, and in the end they caved in anyway. This agreement contains token spending cuts ($23 billion over ten years). However, it restores $63 billion in spending over the next two years that had been cut by the sequester at the beginning of 2013, fully funds the controversial Obamacare health insurance program. Therefore, it signals a complete Republican retreat in the issue.

We had fully expected this outcome, and made that point repeatedly in our coverage of the October Federal shutdown. This agreement will have positive direct and indirect impact on US economic growth. Directly, because on net it ads modestly to Federal spending and therefore domestic demand. Indirectly, because it removes the uncertainty over US budget politics and eliminates whatever remote risk of a technical default on US debt existed before. We think the dollar will be buoyed by these news against other G10 currencies.

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Written by Tom Tong

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