FOREX-Dollar rises from 8-month low but shutdown, debt limit weigh

Fri Oct 4, 2013 12:01pm EDT

Related Topics

* Dollar near eight-month low on U.S. government shutdown

* Dollar bounces from 1-1/2-year low versus Swiss franc

* Prolonged U.S. government closure could postpone Fed tapering

* Euro falls from eight-month high, minor setbacks seen

By Julie Haviv

NEW YORK, Oct 4 (Reuters) - The dollar rose for the first time in six sessions against a basket of currencies on Friday but was still within striking distance of a recent eight-month low as the U.S. government closure and fears about a debt default kept investors cautious.

House Republicans met to plan their next move on the fourth day of a U.S. government shutdown that many fear will drag on until bickering Washington politicians reach a deal to raise the debt ceiling and avoid a default.

Even the possibility of the United States defaulting on its financial obligations for the first time in history has rattled financial markets and prompted warnings that such a move could derail the still fragile economic recovery.

By Oct. 17 Congress must raise the nation's borrowing authority or risk default, and members of Congress now expect it to be the flashpoint for a larger clash over the U.S. budget as well as President Barack Obama's healthcare law.

The dollar held gains versus the euro and sustained losses against the yen after U.S. House Speaker John Boehner told Republicans in the House of Representatives that he will not rely on Democratic votes to pass a "clean" debt ceiling hike without spending cuts, lawmakers said.

The U.S. dollar index, which tracks the greenback against a basket of six major currencies, last traded up 0.3 percent at 79.982, not far from Thursday's eight-month low of 79.627. The euro, which traded weaker, dominates the composition of the index.

"We have already adopted a different trading stance on the dollar over the last months (neutral to short)," said Jens Nordvig, global head of foreign exchange research at Nomura Securities in New York.

Nomura, which updated their main forecasts overnight, said a spike of euro/dollar to $1.37-$1.38 is quite likely in the near term, perhaps within a month, and predicts $1.35 at the end of the year.

The euro fell 0.2 percent to $1.3594, not far from a peak of $1.3645 reached on Thursday, which marked its highest since February. It has risen nearly 0.5 percent on the dollar so far this week.

"We still expect a meaningful move to the downside when we get to a point of monetary policy divergence, and the market should sniff that during 2014," he said.

Nomura expects dollar gains versus most major currencies to be delayed into 2014, mainly due to weak cross-border flows, dovish signals from the Federal Open Market Committee - the Fed's policy-making arm, and mixed data.

The greenback's gains were pronounced against the Swiss franc, rebounding from a 1-1/2-year low reached the previous day. The Swissie was weighed by news that Switzerland's financial markets regulator is investigating several Swiss banks in connection with possible manipulation of foreign exchange rates.

The dollar last traded up 0.5 percent at 0.9034 franc.

Analysts predicted minor setbacks and some consolidation for the euro going into the weekend after its recent ascent. Real money accounts were cited as main sellers of the pair taking it below the $1.3600 mark.

The government shutdown led the U.S. Labor Department to delay the employment report for September, which was slated for Friday. No new date was set for the release of the data.

Thus, any confirmation of an improving labor market that the Federal Reserve wants to see before cutting its stimulus will likely be delayed, hurting the dollar. Two senior Fed officials said monetary policy was being kept easier to help offset the harm caused by political fighting.

"So far markets have mostly treated (the government shutdown) as a U.S.-centric growth shock from fiscal/confidence effects, rather than as a tail-risk shock to market risk," said Dan Dorrow, foreign exchange strategist at Faros Trading.

"The present state of things is emerging market risk-positive as it keeps hyper-accommodative Federal Reserve stimulating flows into emerging markets," he said.

Meanwhile, the resolution of Italy's latest political crisis, the European Central Bank refraining from policy action to help the economy, and this week's data all supported the euro.

Meanwhile, the Bank of Japan kept rates on hold as was widely expected.

The dollar last traded down 0.1 percent against the yen at 97.14 yen, according to Reuters data.

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