The first US government shutdown in 17 years is stoking speculation that the longer it lasts, the more likely the Federal Reserve will delay reducing its monetary stimulus programme, boosting emerging market currencies at the expense of the dollar.
The Fed's stimulus programmes have weighed on the greenback, with the Bloomberg Dollar Index falling 0.75% since September 17.
That was the day before the central bank decided to keep printing cash to buy $85 billion of bonds a month because it has yet to see signs of a sustained economic growth. Now, with the shutdown, at least $300 million a day in economic output will initially be lost.
A two-week shutdown could cut growth by 0.3 percentage point to a 2.3% rate, according to St Louis-based Macroeconomic Advisers.
"If the fiscal issue drags on, the Fed is likely to be less willing to reduce stimulus in the economy. The dollar will suffer if that is the case," said James Kwok, London-based head of currency management at Amundi, which oversees an equivalent of $1 trillion. Kwok said Amundi has reduced bets that the dollar will rise.
The Bloomberg US Dollar Index, which tracks the performance of the greenback against a basket of 10 leading global currencies, fell as much as 0.4% on Tuesday, the first day of the shutdown, its biggest intraday drop in two weeks.
Overconfident Markets Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns that the shutdown could bleed into the more consequential fight over how to raise the $16.7 trillion US debt ceiling to avoid a first-ever default after October 17.
Financial markets are overconfident the fiscal stalemate in Washington will be resolved in time to avoid major economic damage, said White House economic adviser Gene Sperling.
"There is a false sense of complacency among some in the market that somehow things will be always solved at midnight," he said. Commodity-linked currencies such as the Australian dollar appreciated on Tuesday, as did the Colombian peso, Hungarian forint and Russian ruble.
The Bloomberg JPMorgan Asia Dollar Index climbed 0.2% for its biggest gain since September 23. "Markets anticipating that tapering might be delayed might use that as an opportunity to buy higher-yielding assets at the expense of the dollar," said Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group's RBS Securities unit.
"A government shutdown also increases the risk that fiscal problems will prevent any job recovery from being substantial and sustainable." May Drop Against Pound Delayed Fed tapering has benefited inflows to emerging markets.
BlackRock, the world's largest money manager, received $4.45 billion of deposits to its iShares MSCI Emerging Markets ETF in September, the most since December. Meanwhile, JPMorgan's global volatility gauge is lower than its 2013 average.
"As they put tapering further and further out that reduces the volatility in emerging markets," said Axel Merk, who oversees about $450 million of currencies as head of California-based Merk Investments. "These more volatile and less liquid markets are going to do just fine."
There have been 17 government shutdowns in the US since 1976, with five of them occurring within three months of each other.
General risk aversion that typically boosts the dollar will probably be countered by the US being the source of the latest financial instability, according to Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments.
"When markets are risk averse, the dollar and Treasuries have tended to be favoured as the dollar has been the safe haven of choice," he said. "Because there is that mixture of risk aversion causing dollar assets to be slightly more attractive and the US-centric nature of this problem, I would expect the impact to be pretty minimal."
The greenback may drop against the pound and the yen, while any losses against the euro would be limited amid political turmoil in Italy and as investors wait for Germany's coalition talks to be completed, Dickson said.
Meanwhile speculation on taper goes on. According to 59% of 41 economists, in a survey conducted by Bloomberg, the Fed will take the first step in reducing its monthly bond purchases in December.
There is a "relative balance sheet story working against the dollar," said Robert Sinche, global strategist at Pierpont Securities Holdings, Connecticut. "You look around and have to say, why would I take incremental positions in the dollar?
indiatimes.com
The Fed's stimulus programmes have weighed on the greenback, with the Bloomberg Dollar Index falling 0.75% since September 17.
That was the day before the central bank decided to keep printing cash to buy $85 billion of bonds a month because it has yet to see signs of a sustained economic growth. Now, with the shutdown, at least $300 million a day in economic output will initially be lost.
A two-week shutdown could cut growth by 0.3 percentage point to a 2.3% rate, according to St Louis-based Macroeconomic Advisers.
"If the fiscal issue drags on, the Fed is likely to be less willing to reduce stimulus in the economy. The dollar will suffer if that is the case," said James Kwok, London-based head of currency management at Amundi, which oversees an equivalent of $1 trillion. Kwok said Amundi has reduced bets that the dollar will rise.
The Bloomberg US Dollar Index, which tracks the performance of the greenback against a basket of 10 leading global currencies, fell as much as 0.4% on Tuesday, the first day of the shutdown, its biggest intraday drop in two weeks.
Overconfident Markets Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns that the shutdown could bleed into the more consequential fight over how to raise the $16.7 trillion US debt ceiling to avoid a first-ever default after October 17.
Financial markets are overconfident the fiscal stalemate in Washington will be resolved in time to avoid major economic damage, said White House economic adviser Gene Sperling.
"There is a false sense of complacency among some in the market that somehow things will be always solved at midnight," he said. Commodity-linked currencies such as the Australian dollar appreciated on Tuesday, as did the Colombian peso, Hungarian forint and Russian ruble.
The Bloomberg JPMorgan Asia Dollar Index climbed 0.2% for its biggest gain since September 23. "Markets anticipating that tapering might be delayed might use that as an opportunity to buy higher-yielding assets at the expense of the dollar," said Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group's RBS Securities unit.
"A government shutdown also increases the risk that fiscal problems will prevent any job recovery from being substantial and sustainable." May Drop Against Pound Delayed Fed tapering has benefited inflows to emerging markets.
BlackRock, the world's largest money manager, received $4.45 billion of deposits to its iShares MSCI Emerging Markets ETF in September, the most since December. Meanwhile, JPMorgan's global volatility gauge is lower than its 2013 average.
"As they put tapering further and further out that reduces the volatility in emerging markets," said Axel Merk, who oversees about $450 million of currencies as head of California-based Merk Investments. "These more volatile and less liquid markets are going to do just fine."
There have been 17 government shutdowns in the US since 1976, with five of them occurring within three months of each other.
General risk aversion that typically boosts the dollar will probably be countered by the US being the source of the latest financial instability, according to Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments.
"When markets are risk averse, the dollar and Treasuries have tended to be favoured as the dollar has been the safe haven of choice," he said. "Because there is that mixture of risk aversion causing dollar assets to be slightly more attractive and the US-centric nature of this problem, I would expect the impact to be pretty minimal."
The greenback may drop against the pound and the yen, while any losses against the euro would be limited amid political turmoil in Italy and as investors wait for Germany's coalition talks to be completed, Dickson said.
Meanwhile speculation on taper goes on. According to 59% of 41 economists, in a survey conducted by Bloomberg, the Fed will take the first step in reducing its monthly bond purchases in December.
There is a "relative balance sheet story working against the dollar," said Robert Sinche, global strategist at Pierpont Securities Holdings, Connecticut. "You look around and have to say, why would I take incremental positions in the dollar?
indiatimes.com
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