Dollar Falls to 8-Month Low Versus Euro on Shutdown; Yen Drops

NEW YORK (Oct 3)  The dollar slid to the weakest level in eight months versus the euro as the U.S. government’s partial shutdown added to concern that growth will slow and prompt the Federal Reserve to delay tapering monetary stimulus.

The greenback fell for a second day against the euro as House Speaker John Boehner signaled a lack of progress on resolving the U.S. fiscal impasse. Lawmakers also need to agree on raising the debt limit to avoid a default after Oct. 17. The euro rose as a report showed services output in the region expanded more than initially estimated last month. The yen retreated as an advance in Asian stocks damped demand for the safety of Japan’s currency.

“This is more or less the perfect environment for euro-dollar to overshoot,” said Kasper Kirkegaard, a senior strategist at Danske Bank A/S (DANSKE) in Copenhagen. “One of the key drivers is of course the shutdown, but more importantly the debt ceiling deadline is approaching.”

The dollar declined 0.2 percent to $1.3607 per euro at 10:03 a.m. London time after reaching $1.3623, the weakest since Feb. 4. The greenback advanced 0.5 percent to 97.85 yen after dropping 0.9 percent over the previous two days. Japan’s currency retreated 0.8 percent to 133.20 per euro.

The dollar may weaken to about $1.40 per euro, before recovering to trade higher than current levels in the first quarter as the Fed begins its tapering and U.S. money-market rates rise, Kirkegaard said. Economists’ predictions compiled by Bloomberg show the greenback will trade at $1.31 by year-end and strengthen to $1.28 by the end of June.

No Breakthrough

Benchmark 10-year Treasury yields were at 2.65 percent, after reaching a seven-week low of 2.59 percent on Sept. 30. The MSCI Asia Pacific Index of shares rose 0.4 percent.

Ohio Republican Boehner and other congressional leaders met Obama for more than an hour yesterday in Washington. Obama has said he won’t negotiate with Republicans on the budget until they reopen the government and raise the borrowing limit without conditions.

House Republican leaders plan to bring up a measure to raise the debt limit as soon as next week as part of a new attempt to force Obama to negotiate on the budget, according to three people with knowledge of the strategy.

“The U.S. dollar continues to be the loser from the Washington standoff,” National Australia Bank Ltd. analysts led by Peter Jolly wrote in an e-mailed note to clients. In addition to concerns about a drag on economic growth, “fears are also mounting that the ongoing standoff will jeopardize any resolution to the separate debt-ceiling issue.”

Fed Deliberations

The Bloomberg U.S. Dollar Index, which tracks the performance of the greenback against 10 leading global currencies, was little changed at 1,008.81 after falling to 1,007.22, the lowest level since Sept. 19.

The government shutdown comes as the Fed weighs whether the recovery is strong enough to warrant paring back its quantitative-easing stimulus program.

Boston Fed President Eric Rosengren, a consistent backer of record stimulus who votes on policy this year, said yesterday that the central bank refrained from tapering its bond purchases last month because growth was lower than forecast and fiscal policy posed a risk to the outlook.

Unemployment Claims

San Francisco Fed President John Williams, Atlanta Fed President Dennis Lockhart, Dallas Fed President Richard Fisher and member of the Fed board of governors Jerome Powell are all scheduled to speak today.

Initial claims for unemployment benefits rose last week and non-manufacturing output growth slowed in September, according to separate surveys of economists by Bloomberg News. The U.S. Labor department won’t release its monthly payrolls report tomorrow if the government remains closed, according to the Bureau of Labor Statistics.

The dollar has fallen 0.5 percent in the past week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen strengthened 0.8 percent and the euro gained 0.5 percent.

Demand for the yen faltered as Japanese investors bought 672.1 billion yen of overseas bonds and notes in the week ended Sept. 27, according to figures released by the Ministry of Finance.

Investors are seeking higher yields as the Bank of Japan drives down interest rates with more than 7 trillion yen of monthly bond purchases to defeat deflation.