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Dollar Gets a Safe Haven Bid as Government Shutdown Looms

Posted by WorldWideMarkets . on Sep 26, 2013 3:02:00 AM

The irony is that the U.S. dollar can get a bid on solid fundamentals and potential stimulus tapering but also get a bid as the ultimate safe haven play even if the problem that raises risk aversion is U.S. centric.

The U.S. government faces a shutdown on October 1 unless Congress passes a continuing resolution to keep the government running. Right wing Republicans in the lower house are threatening to stall a bill to fund the government unless U.S. President Barack Obama’s signature health care program is defunded. Even the Pentagon is warning over the consequences of a shut down but so far no one is backing down. More moderate Republicans in the Senate say they don’t support the move by Republicans in the lower house or the Senate but the shutdown still looms. Wednesday, the Democrat-controlled Senate agreed to limit early debate on the measure in the hope of passing a bill by this weekend. But battles over the legislation are expected to continue and expect the funding vote to go down to the wire even if Republicans take the heat for stalling. Both houses also have to have some sort of compromise that satisfies Obama.

Where does that leave the dollar? This is one problem among several. Congress has yet to deal with the debt ceiling limit which approaches in mid October and the Federal Reserve is still under scrutiny after failing to taper. Treasury Secretary Jack Lew warned Congress on Wednesday the U.S. will exhaust its borrowing capacity no later than Oct. 17, when the government would have only about $30 billion in cash on hand.

In the last debt ceiling showdown in 2011, the U.S. lost its triple-A credit rating. That didn't really hurt the dollar at the time but it didn't help either. The lower U.S. House of Representatives could vote by Friday on legislation to raise the borrowing limit but it's all now being entangled by the more imminent issue of the budget and becoming very problematic.

Still. with government shutdown the immediate focus, the dollar is getting a safe haven bid. That does not mean that the greenback is going to strengthen materially but more that it is not going to weaken as it did after the Fed decision to keep policy unchanged.

The end result will be the government will do a deal which will end that safe haven bid and leave the dollar in its ongoing weakened state until the Fed announces it will begin to taper its stimulus. But the same FX trading scenario will come up again in the next few days and weeks when the U.S. has to raise the debt ceiling.

It is ironic indeed that the dollar is bid because the U.S. government could default. On any other currency, even a whiff of debt default would see investors fleeing for the exits. But here, they choose to buy the very currency in question on a bet that the U.S. will never default.dollar trading


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