Dollar up from eight-month low but shutdown, debt limit looms

NEW YORK Fri Oct 4, 2013 4:56pm EDT

United States dollar banknotes are seen at the Museum of American Finance in New York October 15, 2010. REUTERS/Shannon Stapleton

United States dollar banknotes are seen at the Museum of American Finance in New York October 15, 2010.

Credit: Reuters/Shannon Stapleton

NEW YORK (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.

Global financial markets have been shaken by the possibility of a U.S. debt default, which would be the first in its history if the U.S. Congress doesn't raise the nation's borrowing limit. It is believed the money runs out by October 17.

The shutdown has already raised concerns the still fragile economic recovery is now in jeopardy of being derailed.

As the shutdown drags into the weekend, currency investors took some of their profits made from a fourth consecutive week of decline for the U.S. dollar off the table, thereby removing some of the selling pressure on the greenback.

"To merit a significant extension in dollar longs you will probably have to get some more positive jobs data and likely have to get a resolution on the government shutdown," said Brian Daingerfield, currency strategist at Royal Bank of Scotland in Stamford, Connecticut.

Daingerfield remarked that the picture now for the greenback is mixed, leaving it somewhat in limbo.

"Today's move is more of a position clearout. Obviously, the dollar has weakened quite a bit since the FOMC decision in September and I think people may be taking advantage of that dollar weakness by taking positions off the table heading into the weekend," he said, referring to the U.S. Federal Reserve's decision not to slow down its pace of monetary stimulus.

The U.S. dollar index .DXY, which tracks the greenback against a basket of six major currencies, last traded up 0.5 percent at 80.145, rebounding from Thursday's eight-month low of 79.627. The index lost 0.17 percent on the week, its fourth straight week with a loss. The euro, which traded weaker, dominates the composition of the index.

The euro fell 0.5 percent to $1.3546, off Thursday's eight-month high of 1.3645. Still, for the week the euro gained 0.23 percent on the greenback.

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.

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 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 rose 0.95 percent to 0.9074 francs.

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 Fed 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 Bank of Japan kept rates on hold, as was widely expected. The BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion ($617 billion) to 70 trillion yen.

The dollar gained 0.2 percent against the yen at 97.41 yen, according to Reuters data.

(Additional reporting Julie Haviv in New York and Anooja Debnath in London; Editing by James Dalgleish and Nick Zieminski)