Dollar Slides as U.S. Shutdown Boosts Fed QE Bets

LONDON (Oct 1) The dollar fell, reaching a 19-month low against the Swiss franc, as a partial shutdown of the U.S. government boosted speculation the Federal Reserve will persevere with asset purchases that debase the currency.

The greenback weakened against all but three of its 16 major peers as the political wrangling threatened to curb growth. Lawmakers still need to agree on raising the U.S. debt limit to avoid a default after Oct. 17. The yen rose as Japanese Prime Minister Shinzo Abe proceeded with a sales-tax increase and stimulus measures. Sweden’s krona jumped as a report showed manufacturing expanded faster than economists predicted.

“The shutdown is dollar negative,” said Alvin Tan, a director of foreign-exchange strategy at Societe Generale SA in London. “These fiscal uncertainties make it more difficult for the Fed to start tapering so the longer they persist, the more aggravated they get, the less likely the Fed will start.”

The dollar fell for a third day against the franc, dropping 0.1 percent to 90.39 centimes at 6:55 a.m. New York time after depreciating to 89.93 centimes, the weakest level since Feb. 29, 2012. The U.S. currency dropped 0.1 percent to $1.3546 per euro after depreciating to $1.3588, the weakest since Feb. 6. The yen gained 0.5 percent to 97.76 per dollar and climbed 0.4 percent to 132.43 per euro.

This is the first U.S. shutdown in 17 years as House and Senate lawmakers failed to agree on a spending plan for the new fiscal year that started today. Chances of a last-minute deal evaporated as the House stood firm on its call to delay major parts of President Barack Obama's health-care law for a year. Senate Democrats were equally firm in refusing.

Destabilizing Effect

Fed Chairman Ben S. Bernanke and his colleagues at the Federal Open Market Committee decided last month to maintain their $85 billion-a-month bond buying program. Fed Bank of New York President William C. Dudley said on Sept. 27 that budget battles in Washington were among the risks to the outlook and he wanted to see more momentum in the economy before paring the pace of quantitative easing.

“The market is anticipating that a shutdown means the Fed will also maintain its easy policy stance for longer because of the risks to the U.S. economy,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “We are seeing some strength in the European currencies and a bit of weakness in the U.S. dollar.”

The pound rose for a third day against the dollar, climbing 0.3 percent to $1.6237 even as a report showed factory expansion in the U.K. slowed in September.

Yen Gains

Japan’s sales tax will be raised to 8 percent in April from 5 percent, Abe said in Tokyo today. He said a 5 trillion-yen economic support package would reduce the negative impact of the increase.

The yen has tumbled 10 percent this year, the worst performer of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The franc appreciated 3.8 percent and the dollar gained 2.3 percent.

Sweden’s krona climbed 0.8 percent to 8.6314 per euro and was 0.9 percent stronger at 6.3716 against the dollar.

An index based on responses from about 200 purchasing managers rose to a seasonally adjusted 56 last month, the highest since May 2011, from 52.2 the previous month, Stockholm-based Swedbank AB (SWEDA), which compiles the data, said today. A reading above 50 indicates an expansion. It was seen declining to 52.1, according to the median estimate of eight economists surveyed by Bloomberg.

Norway’s krone slid to its weakest since November 2010 versus the euro as a report showed the nation’s manufacturing growth slowed last month. The purchasing managers’ index was at 52.3 from a revised 53.2 in August, Danske Bank A/S (DANSKE) said.

The krone was little changed at 8.1351 after touching 8.1712, the weakest since Nov. 29, 2010. It touched 1.0590 Swedish kronor, the least since 2004.

The Australian dollar rose after the central bank left interest rates unchanged and said earlier cuts are still filtering through the economy and boosting asset prices.

The Aussie jumped 1.2 percent to 94.32 U.S. cents, the biggest one-day advance on a closing basis since Sept. 18.