* Dollar index falls to lowest since February
* Dollar struggles as U.S. government shutdown deadline
* Political crisis in Italy weighs on euro
* Euro to remain weighed by ECB policy
By Julie Haviv
NEW YORK, Sept 30 The dollar dropped against an
array of currencies on Monday
as an 11th-hour deal to resolve a Washington budget battle
remained elusive, raising the possibility of a partial
government shutdown as soon as tomorrow.
With a deadline to avert a federal government shutdown fast
approaching, the U.S. Capitol remained eerily quiet on Sunday as
Republicans and Democrats waited for the other side to blink
first and break the impasse over funding.
The high-stakes brinkmanship in Congress will resume on
Monday when the Democratic-controlled Senate reconvenes at 2
p.m. (1800 GMT).
Month-end and quarter-end positioning held sizeable sway
over market activity, causing the dollar to sharply pare losses
against the yen in late morning New York trade, traders said,
but uncertainty about a U.S. government budget deal should
continue to weigh on the greenback.
The dollar last traded 0.5 percent lower against a basket of
six major currencies to trade at 80.154, above an earlier
trough of 80.030, its lowest since February.
The index, at current prices, has fallen about 2.4 percent
in September, its worst month since October, 2011. For the
quarter it notched a roughly 3.6 percent loss, its weakest
performance since the first quarter of 2011.
"The potential of a government shutdown could result in a
sustained fiscal drag on the economy that could push out any
monetary policy normalization by the Federal Reserve," said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in
"Consequently, a government shutdown would likely weigh on
the dollar, especially against traditional safe-haven assets
like the Japanese yen and the Swiss franc," he said.
Against the yen, the dollar was last down 0.1 percent at
98.14 yen, closer to the session's high of 98.23 yen than
a one-month low of 97.48 yen hit earlier in the session.
Against the Swiss franc, the dollar fell 0.2 percent to
0.9038 francs, not far from the 0.9018 francs hit last
week, which was its lowest since April 2012.
The U.S. funding standoff is a harbinger of the next big
political battle: a far-more consequential bill to raise the
federal government's borrowing authority.
Failure to raise the $16.7 trillion debt ceiling by
mid-October would force the United States to default on some
payment obligations - an event that could cripple its economy
and send shockwaves around the globe. Such a scenario should
cause further losses for the dollar.
The euro last traded flat at 132.78 yen having
earlier fallen to a three-week low of 131.33 yen.
However, the euro gained against the dollar to trade 0.1
percent higher at $1.3534. The euro dominates the
composition of the dollar index.
Reflecting the market's nervousness, one-month euro/dollar
implied volatility, a gauge of expected price swings
and derived from option prices, rose sharply to around 7.40
percent, its highest since early September, up from 6.50 percent
The euro earlier had been weighed down by an Italian
political crisis sparked by Silvio Berlusconi's withdrawal of
his ministers from the government on Saturday and call for new
elections, just seven months after the last vote.
Prime Minister Enrico Letta will seek support in a
confidence vote, probably on Wednesday and the possibility of
defections from Berlusconi's party could well help Letta avert
"We are in for a risk-off day as we have a bit of a nasty
combination of U.S. and Italian political problems," said Arne
Lohmann Rasmussen, head of FX research at Danske Bank.
"This is positive for the yen, Swiss franc and sterling. We
would not buy the dollar as a government shutdown would reduce
the chances of the Federal Reserve 'tapering' its stimulus and
that is dollar negative."
The euro could come under further pressure if European
Central Bank president Mario Draghi reiterates on Wednesday,
when the bank announces its rate decision, that he stands ready
to pump more liquidity into the economy if needed.
Analysts at Morgan Stanley said that although they maintain
their long euro position they "adopt a cautious approach.
Indeed, the focus will also switch to the ECB meeting this week,
where a dovish stance is expected," adding that a move above
$1.3570 would be needed for further gains towards $1.3710.
Latest weekly Commodity Futures Trading Commission data
showed currency speculators had cut their bets in favor of the
dollar to the lowest net long in seven months.
The New Zealand dollar, meanwhile, was the strongest
performer versus the dollar among actively traded major
currencies, gaining 0.5 percent to last trade at US$0.8318,
according to Reuters data.