Wednesday, October 16, 2013
DJ: Dollar Steady As Investors Await US Fiscal Deal
The dollar was steady against other major currencies Wednesday as talks in the U.S. over a congressional agreement to reopen the federal government and avoid a default are set to resume in Washington.
The dollar rose 0.5% from late Tuesday's levels to Y98.60 against the yen before settling around Y98.40. The buck was little changed against the euro, which was trading around $1.3520 in European hours.
"The default is a scenario that no market participant is pricing in and the dollar is holding up relatively well against the marginal risk of political accidents," said Thu Lan Nguyen, a currencies strategist at Commerzbank.
U.S. politicians are discussing an agreement to lift the government's $16.7 trillion borrowing limit, which would have to happen before Oct. 17. If the debt ceiling isn't raised by then, the Treasury could miss an upcoming interest payment on its debt and go into default.
Investors remain confident U.S. politicians will be able to strike a deal on the nation's budget and borrowing limit, but the political impasse is affecting investors' perception of the dollar as a safe-haven currency. "This role is increasingly played by the euro, which in line with the yen is now affected negatively by an improvement in risk sentiment," Ms. Nguyen said.
Overnight, Fitch Ratings placed its triple-A rating on the U.S. on "rating watch negative," saying a downgrade is possible by the end of the first quarter next year. Even if Congress reaches a short-term deal to avoid defaulting on U.S. debt, Fitch said the budget impasse has undermined confidence in the effectiveness of the U.S. government and economic policy.
"No doubt it will end with a deal but the further we go the more damaging it is for the economy and the worse this will be for the dollar," said Derek Halpenny, a currencies strategist at Bank of Tokyo-Mitshubishi.
Away from Washington, in a short-lived move the pound spiked to a one-week high of $1.6061 against the dollar after the release of the U.K. employment report at 0830 GMT.
The key ILO unemployment rate was unchanged at 7.7%. Economists had forecast the rate would fall to 7.6%. The employment level has become a key indicator for the future path of monetary policy in the U.K. after the Bank of England said it would wait until the unemployment rate falls to 7% before it will consider raising the interest rate from the record low level of 0.5%. The number of unemployed Britons fell by 18,000 in the three months to August. The fall provided a lift for the pound but wasn't sufficient to push the jobless rate closer to the BOE's threshold.
"Labor market data remains resilient and that bodes well for domestic demand ahead of the retail sales data print tomorrow. The data could help sterling regain some more ground across the board," said Valentin Marinov, a currencies strategist at Citigroup.
Looking ahead, given the lack of relevant U.S. and euro-zone data on the agenda, markets are likely to be driven by headlines coming out of Washington. The publication of the Federal Reserve's Beige Book later in the day is also likely to get unusual interest.
"In the absence of now long-overdue official data, the Fed's Beige Book will require attention, above all as a gauge of underlying growth, employment and price dynamics going into 'Shutdown,'" said Marc Ostwald, strategist at Monument Securities.