The dollar dropped to a one-month low against the yen as political wrangling over the budget threatened a U.S. government shutdown from tomorrow.
The U.S. currency extended its first quarterly drop versus the yen since a year ago with Congress deadlocked over Republicans’ insistence on delaying the 2010 health-care law. The yen climbed against all 16 major peers and reached a three-week high per euro as demand for safety increased with Italian Prime Minister Enrico Letta’s government on the verge of collapse. The pound was at the highest since January before data tomorrow forecast to show U.K. manufacturing accelerated.
“With the government shutdown coming into sight, what is happening in the market is risk aversion and the yen is rising,” said Kengo Suzuki, the chief currency strategist in Tokyo at Mizuho Securities Co. “Concerns that Congress would also fail to agree on raising the federal debt limit may accelerate risk aversion in the near-term.”
The dollar touched 97.53 yen, the weakest since Aug. 29, before trading 0.4 percent lower at 97.89 yen as of 6:48 a.m. in London. Japan’s currency added 0.6 percent to 132.11 versus Europe’s 17-nation tender and reached 131.38, the strongest since Sept. 9. The euro declined 0.2 percent to $1.3497.
“Farce reigns and risk aversion rises,” Kit Juckes, the global strategist at Societe Generale SA in London, wrote in a note to clients. “The U.S. is still heading towards a shutdown, the Italian government is heading for a confidence vote that probably precedes elections. Yen up, euro down.”
The dollar is down 3 percent in the past month, the biggest decline among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes. The yen has fallen 2.7 percent and the euro has declined 0.8 percent.
Over three months, the U.S. currency has fallen 3.5 percent, paring this year’s advance to 2.7 percent. Japan’s currency fell 2.1 percent over three months and 10 percent since Dec. 31, while the euro is up 0.5 percent and 5.3 percent over those time frames.
The U.S. Senate will reconvene today, when it will reject a House of Representatives plan passed yesterday to delay and limit President Barack Obama’s Affordable Care Act. In response, the House would add “another provision” to the spending measure and send it back to the Senate, said Representative Kevin McCarthy, the top House Republican vote counter.
The provision would “reflect the House” and would be one “the Senate can accept,” McCarthy of California said on “Fox News Sunday” without offering details.
Hedge funds and other large speculators betting on a gain in the U.S. dollar against currencies traded on the CME Group Inc. reduced net positions last week to the lowest since April, according to data from the Washington-based Commodity Futures Trading Commission. The cumulative net speculative dollar longs -- in the CME Group’s yen, euro, Swiss franc, British pound, Mexican peso, Australian, New Zealand and Canadian dollar contracts -- fell to 38,471 in the week ended Sept. 24, the least since April 30.
Italian Prime Minister Letta said he will ask for a vote of confidence on Oct. 2, speaking on Rai 3 television. The Italian government has been torn apart by legal troubles facing former leader Silvio Berlusconi, whose criminal tax-fraud conviction subjects him to expulsion proceedings in parliament. Berlusconi allies have said they planned to quit the cabinet.
“Fresh elections thus may be inevitable, a potentially very toxic development for markets given the space it would create for anti-euro, anti-austerity sentiment to rise yet further,” Richard Franulovich, a New York-based currency strategist at Westpac Banking Corp. (WBC), wrote in research dated today. “Neither the euro nor the U.S. dollar have much going for them this week.”
The yen strengthened before Japanese Prime Minister Shinzo Abe is due to outline his plans tomorrow for taxes and an economic-support package. Japan is set to raise its sales tax next year for the first time since 1997, and Abe is expected to introduce a stimulus plan to offset the resulting drag on growth.
A hike in sales tax would spur further gains in the yen unless balanced by measures to support growth, said Stan Shamu, a market strategist at IG Ltd. in Melbourne. “Talk of an urgent call for a corporate tax cut has been suddenly quashed,” he said.
The pound gained versus the dollar before Markit Economics releases a U.K. factory index tomorrow that economists forecast increased to a 2 1/2-year high of 57.5 in September. The pound added 0.2 percent to $1.6165 after touching $1.6181, the most since Jan. 3. Sterling climbed 0.4 percent to 83.49 U.K. pence per euro.
A report today from London-based property researcher Hometrack showed that U.K. house prices rose the most in more than six years this month.
“Further improving growth prospects may ultimately trigger fresh demand for the currency,” Manuel Oliveri, a London-based based currency strategist at Credit Agricole SA wrote in a research note. “We remain of the view that the pound can continue to trend higher.”
Charts: WorldWideMarkets Flash Trader