Dollar pulls lower after U.S. debt-limit deal

October 17, 2013

NEW YORK (Oct 17)  The dollar fell on Thursday after U.S. lawmakers reached a deal to avoid default and end the 16-day partial government shutdown, with currency analysts now looking toward another Washington showdown, possibly early next year.

Congress voted late Wednesday to fund the government until Jan. 15 and extend the debt ceiling until Feb. 7. President Barack Obama signed the bill into law early Thursday.

The dollar’s drop Thursday registered in most major currency pairs, with the euro   rising to $1.3664 from late Wednesday’s $1.3532, while the British pound   rose to $1.6147 from $1.5950.

A reduction in the Federal Reserve’s bond purchases is likely to be delayed until next year, especially as another round of budget debates is likely to take place in January and February. The Federal Reserve currently buys $85 billion in mortgage and Treasury debt each month as part of its stimulus, which has been understood to weigh on the dollar. “The possibility that there could be political noise in January means that the Fed is very unlikely to be tapering ahead of it,” said Sara Yates, global head of foreign-exchange strategy at J.P. Morgan Private Bank. The Fed is likely to begin slowing its bond purchases toward the end of the first quarter in 2014, she said.

The government shutdown prevented the release of key economic data, such as the September jobs report, which are examined closely by Fed officials as they decide when to begin moving toward monetary-policy normalization. The U.S. central bank surprised markets by holding monetary policy steady in September as Fed officials “want greater certainty that the momentum in the U.S. economy is firm,” said Yates.

Yet another reason for a delay in tapering until next year is the changing of the guard at the Fed, she added. President Obama has nominated Janet Yellen, currently the vice chair of the Federal Reserve, to succeed Ben Bernanke as head of the central bank.

“Tapering has been moved, not removed,” said Yates. “At some point, the U.S. economy will get stronger; at some point tapering will start and yields will go up.”

The ICE dollar index, which tracks the U.S. currency against six rivals, slipped to 79.689 from late Wednesday’s 80.469, while the WSJ Dollar Index, an alternate measure of dollar strength, fell to 72.08 from 72.79.

Data released Thursday showed initial jobless claims for the week ended Oct. 12 dropped by 15,000 to 358,000. The claims were higher than economists had expected because of processing delays in California and shutdown-related layoffs.

Crédit Agricole analysts said the short-term nature of the U.S. deal offered little to celebrate.

“A deal is done in Washington, but ultimately there is no long-term resolution to the budgetary issues,” they wrote. “The completed framework includes government funding through Jan. 15 and a debt limit extension through Feb. 7. The result is stop-and-go fiscal policy and more drama expected down the road.”

Silver Phoenix Twitter                 Silver Phoenix on Facebook