Ongoing concerns about the U.S. Fiscal Cliff have kept the dollar bid against many of the major currencies. With less than 5 weeks to go before the end of the year, time is running out quickly and unless there are some hints of compromise over the next few days, currencies and equities will continue to fall. While the Fiscal Cliff poses the biggest risk to the U.S. economy, deleveraging has made the dollar the biggest beneficiary of safe haven flows. As the deadline nears, we could see a further reduction in risk if no real progress is made. The only hope comes from the fact that everyone knows there’s a lot at stake. If Congress allows Bush era tax cuts and mandatory discretionary programs to expire at the end of the year, the U.S. economy could plunge back into recession and no one wants to be responsible for that.

According to this morning’s new home sales report, sales fell 0.3% in October. Economists were looking for a small increase after a large rise the previous month but not only did sales decline but the past month’s report was also revised sharply lower. In September sales rose a mere 0.8% compared to an original report of 5.7% growth. The median price of a home sold also dropped for the second month in a row by 4.2%, reflecting continuing weakness in housing demand. While sales of existing homes have been strong, there has been virtually no growth in new home sales over the past 3 months. Low interest rates have been supportive of the housing market but the sector lacks momentum and will be unable to fully recover until there is a broader economic recovery. According to the minutes from the last Federal Reserve meeting, the housing market remains an area of concern for the central bank.

As a result, don’t expect much help from this afternoon’s Federal Reserve Beige Book report. Fed officials have erred on the side of caution, eyeing every improvement in the U.S. economy with caution. Since the last monetary policy meeting we have seen steady housing and manufacturing activity, continued growth in services, a rebound in job growth and mixed retail sales. While the census bureau reported the first decline in retail sales in 4 months, spending on Black Friday and Cyber Monday reached record highs. Unfortunately, the central bank wants to increase monetary stimulus once Operation Twist ends in December and their desire to ease suggests an air of caution. We may not see much optimism despite recent improvements in the U.S. economy as the 12 Fed districts may report concerns about the recent slide in equities and the Fiscal Cliff but if more optimism would help support risk appetite. The last Beige Book report found the U.S. economy expanding modestly thanks to improvements in the housing market and stronger demand for autos. However while there were signs of life in the labor market, “consumer spending was generally reported to be flat to up slightly since the last report.”

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