There are 3 main issues that should determine the USD‘s fate in Q4.
The US November elections
Regardless of who will win, the expiration date for tax cuts and automatic spending programs will be extended beyond December 31st.
Given the highly partisan nature of the US government, unless either candidate has a strong majority in Congress, there’s not enough time for a formal grand sweeping agreement to be reached.
When the elections are over, smaller deficit reduction measures will most likely be announced and then followed by a new deadline for tax cuts to expire in the first or second quarter.
While this means that the issue of the fiscal cliff can be avoided for now, it could raise concerns about the US sovereign debt rating, which would be a problem for the USD.
Leadership change in China
China is gearing up for its most significant leadership change in more than a decade.
It’s unclear when it will happen, but most likely in October.
While many people believe that this won’t have a big impact on the financial markets because the party remains the same, there is one scenario that could.
The Chinese government could choose to announce substantial monetary or fiscal easing, to drive confidence in the new government.
Stimulus from China would be extremely positive for risk appetite and bearish for the USD.
No bailout for Spain, no progress at EU summit
Continued problems in Europe could maintain the attractiveness of the USD and push it higher despite the above issues.
However, thus far Spain has refused to ask for help unless it comes without conditions (more austerity measures and audits of Spain finances).
The longer that Spain holds out, the greater the concern about their fiscal performance which could ultimately renew risk aversion, sending investors back into the USD.
EU Leaders will be holding two key, In October and November.
If they do nothing but fight over near term crisis measures and the banking union, concerns about the future of the euro and the critical safety net for the banking sector could also drive the euro lower and the dollar higher.
Europe poses the greatest risk to the financial markets. If the actions by central banks in September effectively calm EU anxiety, then the USD should weaken as risk appetite and the EUR rise.