FOREX-Dollar down as investor focus returns to U.S. economy, Fed
* U.S. House, Senate pass bill to avert debt default * U.S. currency pulls back from 3-week high against yen NEW YORK, Oct 17 (Reuters) - The dollar slid against a basket of currencies on Thursday as a deal to end the U.S. debt stalemate in Congress prompted investors to focus on the economic impact of the government shutdown. Analysts said the two weeks of uncertainty that knocked investor and business confidence would have dented the growth prospects of the world's largest economy. That would likely keep the Federal Reserve from withdrawing monetary stimulus at least until the beginning of next year. As such, U.S. Treasury yields slipped and dragged the dollar down against most major currencies, including the yen. Adding to the dollar's woes was Chinese rating agency Dagong, which downgraded the United States to A- from A and maintained its negative outlook. Though not followed widely outside China, moves from other ratings agencies will concern investors. "Near-term risk has been eased, but there has not been a medium term resolution, which still threatens rating agency action," said said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. "Markets have reacted with an increase in risk appetite." The dollar index was down 0.9 percent at 79.718, well off a one-month high of 80.754 struck on Wednesday. Against the yen, it lost 1 percent to trade at 97.81 yen, pulling back from a three-week high of 99.00 yen set much earlier in the global day. The dollar lost momentum after rising initially in anticipation of an end to the fiscal impasse, falling to lows versus the yen after the U.S. House of Representatives approved a deal already passed by the Senate. The deal offers only a temporary fix and does not resolve the fundamental issues of spending and deficits that divide Republicans and Democrats. "We would expect this impasse to shave off part of fourth-quarter growth and hurt consumer confidence especially from the government sector," said Simon Derrick, head of currency strategy at BNY Mellon in London. "What this does is push back expectations of Fed tapering to early 2014 and this is dollar negative." The Fed's Beige Book report on Wednesday suggested confidence had been dampened somewhat by uncertainty caused by budget battles in Washington. CARRY TRADES The dollar's broad losses saw the euro rise 0.9 percent to $1.3659 with a peak of 1.3663, its highest since early February. It also pushed growth-linked currencies including the Australian and New Zealand dollars to fresh multi-month highs. The Australian dollar rose past reported option barriers at $0.9600 to hit a four-month high. The New Zealand dollar soared to a five-month high. With implied volatilities - a gauge of how choppy currency moves are likely to be - anchored, and expectations that Fed is likely to keep pumping in dollars at $85 billion a month, analysts said conditions were turning in favour of dollar-funded carry trades. In carry trades, investors borrow in a low yielding currency to buy a higher yielding or riskier one to earn better returns. "With soft but positive economic growth, and investors ever more confident that a Fed exit isn't around the corner, we remain skewed towards selective bullish risk positions," Societe Generale analysts said in a note. "They are a green light for risk takers to position for a recovery of the G-10 carry trade."
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