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Dollar at 9-Month Low Versus Pound on Shutdown; Aussie Rallies - (Bloomberg)

Posted by Chris Advincula on Oct 1, 2013 4:19:00 AM

The dollar slid to the lowest since Jan. 3 versus the pound after a partial shutdown of the U.S. government began with Congress in partisan dead-lock.

The U.S. currency dropped against most major peers as the wrangling between Senate Democrats and House Republicans threatened to stunt growth at a time when the central bank is weighing a tapering of stimulus. The yen fell briefly after the Bank of Japan’s Tankan survey beat economists’ estimates, and Prime Minister Shinzo Abe said he will proceed with the first sales-tax increase since 1997. Australia’s dollar rallied after the Reserve Bank refrained from cutting interest rates.

“The market is anticipating that a shutdown means the Federal Reserve will also maintain its easy policy stance for longer because of the risks to the U.S. economy,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “We are seeing some strength in the European currencies and a bit of weakness in the U.S. dollar.”

The dollar fell 0.3 percent to $1.6233 versus the pound as of 7:03 a.m. in London and touched as low as $1.6247, declining for a third day. The U.S. currency fell 0.1 percent to $1.3541 per euro. The yen rallied 0.1 percent to 98.16 per dollar after falling as much as 0.5 percent. It was little changed at 132.92 per euro.

This is the first shutdown in 17 years as House and Senate lawmakers failed to agree on a spending plan for the new fiscal year that started today.

No Deal

Chances of a last-minute deal -- seen so often in past fiscal fights -- evaporated shortly before midnight as the House stood firm on its call to delay major parts of President Barack Obama’s health-care law for a year. Senate Democrats were equally firm in refusing.

President Barack Obama said Sept. 27 that failure to approve funding to keep the government open and to raise the debt ceiling would have a destabilizing effect on the economy. Closing the government would cut fourth-quarter economic growth by as much as 1.4 percentage points depending on the length of the shutdown, according to economists from Moody’s Analytics Inc. to Economic Outlook Group LLC.

The Treasury has said measures to avoid breaching the debt ceiling will be exhausted on Oct. 17.

“The yen, the pound and, to a lesser extent, the euro have all benefited from the uncertainty,” said Andrew Salter, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “Those currencies are reserve currencies with financial markets that can accommodate a flight to quality.”

Abenomics Expectations

The yen slid after a report showed confidence among Japan’s large manufacturers rose to the highest since the early stages of the global credit crisis in 2007, as Prime Minister Abe judged the economy is strong enough to withstand a sales tax increase.

The quarterly Tankan index for big manufacturers climbed to 12 in September from 4 in June, the BOJ said today. That exceeded the 7 median estimate of economists surveyed by Bloomberg News.

The sales tax will be raised to 8 percent in April from 5 percent currently, Abe said in Tokyo today. He said an economic package can reduce the negative impact of the increase. He will give a press conference at 6 p.m. in Tokyo.

“The focus now shifts to the size and effectiveness of an economic package that is expected to be announced,” said Yuji Saito, the director of foreign-exchange at Credit Agricole Corporate & Investment Bank in Tokyo. “Depending on the content of the package, it may help sustain overseas investors’ expectations for Abenomics, and a continued rise in Japanese stocks and weakness in the yen.”

Entrenched Deflation

Abe and the BOJ are trying to revitalize the economy and end 15 years of entrenched deflation through an unprecedented stimulus program that has weakened the yen 21 percent against the dollar in the past 12 months, the most among 15 major peers.

Australia’s dollar gained against all its major peers after the central held the cash rate target at 2.5 percent following a policy meeting today. The decision was predicted by all 33 economists in a Bloomberg survey.

“The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values,” Reserve Bank Governor Glenn Stevens said in a statement. “The full effects of these decisions are still coming through, and will be for a while yet.”

“The RBA statement looks very neutral, which will disappoint those looking for further easing,” Kit Juckes, the global strategist at Societe Generale SA in London, wrote in a note to clients. Australia’s dollar is a winner, he wrote.

The Aussie jumped 0.8 percent to 93.92 U.S. cents. 


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