Dollar Drops on Political Impasse; Volatility Falls

Photographer: Andrew Harrer/Bloomberg

A neon dollar sign is hung on the wall at the Bureau of Engraving and Printing in Washington, D.C. Without an increase in the limit, the U.S. government will exhaust its borrowing authority on Oct. 17, according to the Treasury Department. Close

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Photographer: Andrew Harrer/Bloomberg

A neon dollar sign is hung on the wall at the Bureau of Engraving and Printing in Washington, D.C. Without an increase in the limit, the U.S. government will exhaust its borrowing authority on Oct. 17, according to the Treasury Department.

The dollar fell versus 11 of its 16 most-traded counterparts as U.S. lawmakers struggled to resolve a political impasse over raising the nation’s debt limit and ending a partial shutdown of the government.

The greenback erased its first loss in five days versus the yen after President Barack Obama summoned congressional leaders to the White House and Democratic and Republican Senate leaders said they’re optimistic about reaching an agreement. New Zealand’s dollar gained after data showed home prices rose to a record. A measure of volatility among Group of Seven nations’ currencies fell to the lowest since January.

“The debt issues are dominating people’s thinking,” Brad Bechtel, the managing director at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “The market’s not willing to really bet too heavily on the outcome until they really see the news.”

The dollar was little changed at 98.57 yen at 5 p.m. New York time after weakening earlier as much as 0.5 percent to 98.08 yen. It rose 1.9 percent in the previous four days. The greenback fell 0.1 percent to $1.3561 per euro. Japan’s currency declined 0.1 percent to 133.67 per euro after weakening to 133.60 on Oct. 11, the least since Sept. 26.

The Bloomberg U.S. Dollar Index, which tracks the currency’s performance against a basket of 10 leading counterparts, slid as much as 0.23 percent, the biggest intraday drop since Oct. 2, to 1,010.07 before trading at 1,011.21, down 0.12 percent.

Lower Volatility

JPMorgan Chase & Co.’s G-7 Volatility Index, a gauge of price swings, touched 8.21 percent, the lowest intraday level since Jan. 23. The gauge has dropped from this year’s high of 11.96 percent on June 24. The 2013 average is 9.47 percent.

New Zealand’s dollar, nicknamed the kiwi, climbed versus all of its 16 most-traded counterparts after the Real Estate Institute of New Zealand said a home-price index rose 0.8 percent in September from a month earlier to an all-time high.

The kiwi gained 0.4 percent to 83.57 U.S. cents and touched 83.81 cents, the highest level since Sept. 24.

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell said they’re optimistic about ending the government shutdown and preventing the nation from breaching the debt ceiling. Without an agreement, U.S. borrowing authority lapses Oct. 17. The federal government would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

Risk appetite improved, and stocks rose. The Standard & Poor’s 500 (SPX) Index advanced 0.4 percent after declining 0.7 percent earlier.

Force Deal

“Obviously, the closer you get to Oct. 17, it’s something that can force the deal and get more optimistic comments,” Alan Ruskin, Deutsche Bank AG’s New York-based global head of Group of 10 foreign exchange, said in a telephone interview. “The dollar’s been recovering against the yen. Risk assets will probably do OK in this scenario.”

Obama postponed his meeting with congressional leaders, first scheduled for 3 p.m. Washington time, to “allow leaders in the Senate time to continue making important progress” toward a deal, according to a White House statement.

“It continues to weigh on the dollar,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “If we see some degree of improvement, then that will provide some support for the dollar.”

Forecasts Lowered

The wrangling in Washington led strategists to cut their forecasts for the dollar for a third straight month in October, the longest stretch this year.

From Credit Suisse Group AG to Westpac Banking Corp. (WBC), firms have lowered the median estimate for the U.S. currency versus the euro, pound, Canadian dollar, Swiss franc and Japanese yen by an average 1.2 percent in October, data compiled by Bloomberg show. That follows a 1.7 percent reduction last month, which was the biggest this year, and a 1.2 percent cut in August.

The dollar declined 1.2 percent in the past month, according to Bloomberg Correlation Weighted Indexes, which track 10 developed-country currencies. The euro gained 1 percent, and the yen slipped 0.4 percent.

Trading in over-the-counter foreign-exchange options totaled $34 billion, from $35 billion on Oct. 11, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-Chinese-yuan exchange rate amounted to $9.5 billion, the largest share of trades at 28 percent. Options on the dollar-yen rate totaled $5.8 billion, or 17 percent.

Dollar-yuan options trading was 445 percent more than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Dollar-yen options trading was 62 percent above average.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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