October 11, 2013 / 4:01 PM / 5 years ago

FOREX-Dollar on pace for weekly gain on optimism about debt deal

* Dollar rises vs yen on prospect of U.S. debt deal
    * Obama and Republicans struggle to reopen gov't, raise debt
    * Dollar index on pace for 0.3 percent gain this week

    By Wanfeng Zhou
    NEW YORK, Oct 11 (Reuters) - The dollar edged lower against
a basket of major currencies on Friday but was still headed for
its first weekly gain in five, as optimism grew that Washington
may soon clinch a stop-gap deal to avert a devastating U.S.
    President Barack Obama and congressional Republican leaders
moved to end their fiscal impasse on Friday but struggled to
strike a deal on the details for a short-term reopening of the
federal government and an increase in the U.S. borrowing limit.
    Uncertainty remained, however, given the high likelihood
that no deal will be reached to raise the limit by the Oct. 17
deadline, analysts said, which could pressure the dollar and
help safe-haven currencies such as the yen. Worries about the
U.S. budget and debt crisis had driven the dollar to an
eight-month low last Thursday.
    "A short-term deal would keep the level of uncertainty
relatively high and likely keep consumers' and business
sentiment pressured," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington D.C. 
    "The ongoing fiscal drag would, in turn, likely keep the
Federal Reserve from scaling back its monetary easing further
into 2014." 
    The dollar index, which tracks the greenback against
a basket of six major currencies, slipped 0.1 percent to 80.352.
It's on pace for a gain of 0.3 percent this week, the first
weekly rise since early September.
    Options investors are curbing bets that profit from a
stronger dollar, with one-week euro/dollar risk reversals
 showing options investors sought the smallest
protection against the euro's depreciation since January.
One-year risk reversals show demand for euro puts,
the right to sell the euro at a future date, at its smallest
since April.   
    The dollar rose 0.2 percent to 98.36 yen, having hit
a session peak of 98.55 yen, according to Reuters data, the
highest since Oct. 1. Support is seen at the 200-day moving
average of 96.87 yen.
    The euro rose 0.3 percent to $1.3558.
    Paul Bednarczyk, head of research at 4CAST, said markets
were hoping for a deal before the end of the weekend. 
    "If we get a deal that is more than just can-kicking, then
equities will go up and dollar/yen will go up with it. There is
a very reliable correlation at the moment and nobody is going to
fight it," he said, adding that the dollar could target 100 yen.
    High-yielding, growth-sensitive currencies rose. The New
Zealand dollar gained 0.6 percent to $0.8327. The
Australian dollar added 0.2 percent to $0.9470.
    The fiscal impasse has taken the spotlight off the Federal
Reserve for now but expectations are growing that it will have
to evaluate the impact of the government shutdown, now in its
11th day, before starting to scale back its stimulus under which
it buys $85 billion per month of Treasuries and mortgage bonds.
    A survey showed Friday that U.S. consumer sentiment
deteriorated in October to its weakest in nine months as the
first federal government shutdown in 17 years undermined
Americans' outlook on the economy. The dollar
showed little reaction to the data.
    "If it was not already, it will be near impossible for the
Fed to commence tapering before year-end if only a six-week debt
extension is agreed," said Tom Levinson, FX strategist at ING,
in a note to clients.
    He said the dollar index would struggle to sustain a rally
to 81.00, the level it reached before the U.S. central bank
surprised markets on Sept. 18 by opting not to start trimming
its bond buying.
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