Dollar dips, Treasuries jump as focus shifts to U.S.

NEW YORK (Oct 17)   The dollar fell and Treasuries gained on Thursday as relief over a U.S. budget deal shifted to focus over the effect of the 16-day government shutdown on the economy and prospects of a re-run early next year.

Analysts said economic weakness resulting from the shutdown and uncertainty over the next round of budget and debt negotiations may keep the Federal Reserve from withdrawing monetary stimulus at least until a few months into next year.

The legislation signed overnight by President Barack Obama to fund the government until Jan. 15 and extend a debt ceiling deadline to Feb. 7, pulling the world's biggest economy back from the brink of a historic default, did little to resolve the underlying disputes that led to the crisis in the first place.

The dollar index was down 1 percent at 79.700, well off a one-month high of 80.754 struck on Wednesday. Against the yen, it lost 0.9 percent to trade at 97.83 yen, pulling back from a three-week high of 99.00 yen set earlier in the global day. The dollar trough on Thursday against the yen was the lowest in a week and was the largest percentage fall in a month.

"The U.S. dollar is the worst performing currency as attention shifts from the U.S. debt debacle to incoming Fed rhetoric," said Christopher Vecchio, currency analyst, at FXCM-owned in New York.

In the U.S. Treasury market, the 10-year benchmark Treasury note was up 19/32, its yield down at 2.6013 percent from 2.67 percent on Wednesday, when yields also eased in anticipation of a debt ceiling deal.

Also, interest rates on ultra-short-term U.S. government debt fell sharply. The government had been expected to exhaust its $16.7 trillion statutory borrowing limit on Thursday, raising the risk it would not meet benefit payments and debt obligations in coming days.

Fears that the Treasury Department might delay paying debt holders made some large money market funds shed holdings of Treasury bills that mature in the second half of October into the first half of November. These were seen as most vulnerable if the government could not increase its borrowing capacity in time.

The unease in holding these T-bills catapulted their interest rates to levels not seen in five years. The one-month yields were briefly double the yields on two-year Treasury notes .

On Thursday, with prompt payment on short-term debt now assured, rates on October U.S. Treasury bills due Nov. 14 last traded at 0.020 percent, down 13 basis points from late on Wednesday.

U.S. stocks were nearly flat, with disappointing results from top companies, including International Business Machines and eBay keeping a lid on the market.

On Wall Street, the Dow Jones industrial average was down 48.41 points, or 0.31 percent, at 15,325.42. The Standard & Poor's 500 Index was up 4.85 points, or 0.28 percent, at 1,726.39. The Nasdaq Composite Index was up 12.31 points, or 0.32 percent, at 3,851.74.

MSCI's world equity index, tracking shares in 45 countries, touched a five-year high and was last up 0.7 percent. European shares were up 0.1 percent.


The temporary nature of the agreement and longer-term worries that the debt ceiling risks would become a structural drag on the economy remained a worry.

The likelihood that the fiscal saga would mean a delay in the start of the Fed's planned withdrawal of its monetary stimulus was strengthened by Dallas Fed President Richard Fisher.

In remarks prepared for delivery to the Economic Club of New York, he said: "Kicking the can down the road for a few months will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future."

Markets had expected the Fed to announce in September that it would cut its bond purchases. When that did not happen, they switched forecasts to December, and now many anticipate no action until next year.

By pushing back expectations of Fed tapering, the deal encouraged traders to the sell the dollar against the currencies of nations perceived to have less-accommodative policies.

The weaker dollar and the likelihood of Fed holding back on reducing its monetary stimulus also gave gold a big lift.

Spot gold rallied to a high of $1,322.56 per ounce early in the U.S. session, up more than 3 percent on the day.

Oil prices declined, with Brent crude down $1.31 cents at $109.28 a barrel and U.S. crude oil down $1.83 at $100.46.