September 26, 2013 / 4:28 PM / 4 years ago

FOREX-Dollar climbs but gains seen limited by U.S. budget cliffhanger

* Dollar slips, wariness over possible U.S. gov't shutdown
    * Euro hurt by renewed Italian political tensions
    * Japan corporate tax-cut hopes lead to yen-selling

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 26 (Reuters) - The dollar advanced on
Thursday, rebounding from the previous day's losses, after
stronger-than-expected U.S. weekly jobless claims data supported
a wind-down by the Federal Reserve of its bond-buying stimulus
program. 
    The greenback was also helped by the euro's fall on 
political uncertainty in Italy, the euro zone's third largest
economy.
    But the dollar's gains are expected to be limited as
Democrats and Republicans in Congress go down to the wire in
budget negotiations to avert a government shutdown on Oct. 1 and
raising the federal debt limit, needed to avert a possible
federal debt default in mid-October.
    "The expectation is that tapering will still occur, given
the underlying strength in the U.S. economy. The timing of that
tapering is still in question, but the direction has never been
in doubt," said Lane Newman, director of foreign exchange at ING
Capital Markets in New York.
    On Thursday, data showed 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 their computer systems. 
    In midday New York trading, the dollar was up 0.3
percent against a basket of currencies at 80.563, not that far
from a 7-month trough of 80.06 hit on Sept. 18.
    "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.
    In the bigger picture, the focus shifted back to the U.S.
budget fight, which is negative for equities and investments,
ING's Newman said.
    Investors were wary of buying the dollar while the U.S.
Congress struggled to avert a government shutdown next week.
Still, many analysts believed this would be resolved like 
previous budget standoffs. 
    The dollar has also 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 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 euro fell against the dollar after 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 down 0.3 percent at $1.3485.
    Against the yen, the dollar was up 0.5 percent at
98.93 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 stock index, Nikkei, higher.

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