FOREX-Dollar gains but U.S. budget cliffhanger limits upside

Thu Sep 26, 2013 2:12pm EDT

Related Topics

* Dollar gains despite wariness over possible U.S. gov't
shutdown
    * Euro hurt by renewed Italian political tensions
    * Barclays expects dollar to trade sideways with downward
bias near term
    * Japan corporate tax-cut hopes lead to yen-selling

    By Julie Haviv
    NEW YORK, Sept 26 (Reuters) - The dollar notched broad gains
on Thursday, recouping losses from the previous session, after
stronger-than-expected U.S. weekly jobless claims data supported
market expectations for a wind-down of the Federal Reserve's
bond-buying stimulus program.
    The dollar's upside, however, should be limited in the near
term as worries about a potential U.S. government shutdown and
the possibility of a default are keeping investors cautious.
    U.S. House of Representatives Republicans refused to give in
to President Barack Obama's demands for straightforward bills
keeping the government running beyond Sept. 30. 
    House Republicans also challenged Obama on the debt ceiling
increase, the amount the government is allowed to borrow, that
the Treasury Department says is urgently needed by Oct. 17. 
   
    In afternoon trading, the dollar was up 0.3 percent
against a basket of currencies at 80.574, above a seven-month
trough of 80.06 hit on Sept. 18.
     The dollar was buoyed by weekly data showing the level of
initial jobless claims came in much better than expected, with a
fall near a six-year low, suggesting a steadily improving labor
market. 
    The reading gave a clearer view of the labor market after
the number of claims earlier in September may have been
distorted as two states updated their computer systems. 
    "The dollar ... found an overall tailwind in unsurprisingly
solid news on America's job market, which keeps a Fed taper on
the table for possible use in late October," said Joe Manimbo,
senior market analyst at Western Union Business Solutions in
Washington.
    The dollar has struggled since the Fed stunned markets
recently by deciding not to scale back its massive stimulus,
which raised the question of whether markets have been too
optimistic on the U.S. economy.
    In another criticism about how the Fed handled the decision
last week, Fed Governor Jeremy Stein said the Fed - the U.S.
central bank - should make itself more predictable about scaling
back its stimulus campaign. He maintained the Fed had confused
markets by not tapering at its meeting last week.
    Stein said he would have been comfortable starting to reduce
asset purchases at the Sept. 17-18 meeting, and that the
decision to keep buying at an $85 billion monthly pace had been,
for him, a "close call". 
    "The Fed's decision to postpone tapering delays, but does
not derail, our constructive dollar outlook," Barclays Capital
said in a report.
    Barclays expects the delays to add $250 billion to the Fed's
balance sheet and the bank therefore expects the dollar to trade
sideways with a downward bias in the near term.
    Emerging market currencies have fared well from the Fed's
bond-buying as investors plowed cash into higher-yielding
assets.
    "For the first time in months, we think it is time to take
profit on our short emerging market carry positions held since
the start of the year," the bank said.
    Barclays believes a broad-based dollar rally against the
major currencies, including the euro, will have to wait until
the Fed begins to taper, which the bank expects in December, or
until growth trends in the United States and EU re-diverge. 
    The greenback on Thursday was also helped by the euro's fall
on  political uncertainty in Italy, the euro zone's
third-largest economy.
    Italian center-right deputies, supporting former Prime
Minister Silvio Berlusconi, renewed threats to resign if their
leader is expelled from Parliament following a tax fraud
conviction. 
    The euro was last down 0.3 percent at $1.3482.
Against the yen, the dollar was up 0.5 percent at 98.92 
yen. 
    The dollar earlier rose as high as 99.13 yen on a media
report the Japanese government plans to say it will "urgently
consider" cutting the corporate tax rate when it compiles a
stimulus package next week.
    A government source told Reuters last week that Japan will
consider cutting corporate taxes and ending a temporary tax hike
earlier than scheduled, to cushion the economy from a scheduled
sales tax increase. 
    That would add up to more stimulus than previously expected
for the economy, which is negative for the yen, helping push
Japan's benchmark Nikkei stock index higher.
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