Dollar Seen as Shutdown Loser as Growth Hit Spurs QE
The first U.S. government shutdown in 17 years is stoking speculation that the longer it lasts, the more likely the Federal Reserve will delay reducing its monetary stimulus program, boosting emerging-market currencies at the expense of the dollar.
At least $300 million a day in economic output will initially be lost because lawmakers can’t agree on a budget, according to IHS Inc. (IHS) A two-week shutdown starting Oct. 1 could cut growth by 0.3 percentage point to a 2.3 percent rate, according to St. Louis-based Macroeconomic Advisers LLC.
The Fed’s stimulus programs have weighed on the greenback, with the Bloomberg Dollar Index falling 0.9 percent since Sept. 17. That was the day before the central bank decided to keep printing cash to buy $85 billion of bonds a month because it has yet to see signs of sustained economic growth. The Bloomberg JPMorgan Asia Dollar Index (ADXY) is up 0.3 percent in that period.
“If the fiscal issue drags on, the Fed is likely to be less willing to reduce stimulus in the economy. The dollar will suffer if that is the case,” James Kwok, the London-based head of currency management at Amundi, which oversees an equivalent of $1 trillion, said yesterday in a phone interview. Amundi has reduced bets the dollar will rise, according to Kwok.
Congressional leaders have scheduled no further negotiations on spending legislation, raising concerns among some lawmakers that the shutdown could bleed into the more consequential fight over how to raise the $16.7 trillion U.S. debt ceiling to avoid a first-ever default after Oct. 17.
Financial markets are overconfident the fiscal stalemate in Washington will be resolved in time to avoid major economic damage, White House economic adviser Gene Sperling said.
“There is a false sense of complacency among some in the market that somehow things will be always solved at midnight,” Sperling, the director of President Barack Obama’s National Economic Council, told Bloomberg News reporters and editors yesterday in Washington.
The Bloomberg U.S. Dollar Index, which tracks the performance of the greenback against a basket of 10 leading global currencies, fell as much as 0.4 percent yesterday on the first day of the shutdown, its biggest intraday drop in two weeks. The gauge has dropped 4.2 percent from this year’s high of 1,054.48 based on closing prices to 1,010.38 as of 8:42 a.m. in New York.
Currencies whose fortunes are linked to the commodities market such as the Australian dollar appreciated yesterday, as did the Colombian peso, Hungarian forint and Russian ruble. The Bloomberg JPMorgan Asia Dollar Index climbed 0.2 percent for its biggest gain since Sept. 23.
“Markets anticipating that tapering might be delayed might use that as an opportunity to buy higher-yielding assets at the expense of the dollar,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said yesterday in a phone interview. “A government shutdown increases the risk that fiscal problems will prevent any job recovery from being substantial and sustainable.”
The premium on three-month options granting the right to buy the dollar against Brazil’s real, compared with those allowing for sales, fell to 2.87 percentage points, the lowest since Aug. 14, according to 25-delta risk reversal rates compiled by Bloomberg.
Delayed Fed tapering has benefited inflows to emerging markets. BlackRock Inc., the world’s largest money manager, received $4.45 billion of deposits to its iShares MSCI Emerging Markets ETF (EEM) in September, the most since December, according to data compiled by Bloomberg. Meanwhile, JPMorgan’s global volatility gauge remains lower than its 2013 average.
“As they put tapering further and further out that reduces the volatility in emerging markets,” Axel Merk, who oversees about $450 million of currencies as head of Palo Alto, California-based Merk Investments LLC, said yesterday in a phone interview. “These more volatile and less liquid markets are going to do just fine.”
The JPMorgan Global FX Volatility Index was at 9.15, down from 10.41 Sept. 3. Smaller expected price swings tend to boost the appeal of higher-yielding, riskier assets such as emerging-market currencies.
The U.S. government was partially closed yesterday with Congress deadlocked over whether to tie any changes to the 2010 health-care bill to an extension of government funding. Even if the budget fight is resolved, lawmakers would immediately move to the next fiscal dispute over raising the debt ceiling.
There have been 17 government shutdowns since 1976, with five of them occurring within three months of each other.
General risk aversion that typically boosts the dollar will probably be countered by the U.S. being the source of the latest financial instability, according to Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees about $289 billion.
“When markets are risk averse, the dollar and Treasuries have tended to be favored as the dollar has been the safe haven of choice,” he said yesterday in a phone interview. “Because there is that mixture of risk aversion causing dollar assets to be slightly more attractive and the U.S.-centric nature of this problem, I would expect the impact to be pretty minimal.”
The greenback may drop against the pound and the yen, while any losses against the euro would be limited amid political turmoil in Italy and as investors wait for Germany’s coalition talks to be completed, Dickson said, adding that the U.S. currency may also gain versus emerging-market peers.
The Fed will take the first step in reducing its monthly bond purchases in December, according to 59 percent of 41 economists in a Sept. 18-19 survey conducted by Bloomberg.
Fed Chairman Ben S. Bernanke reset the central bank’s timeline for asset purchases on Sept. 18 and refrained from any tapering of the bond-buying program, surprising economists who, in a Sept. 6 survey, said the central bank would reduce the size of the program to $75 billion.
There’s a “relative balance-sheet story working against the dollar,” Robert Sinche, the global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said yesterday in a phone interview. “You look around and have to say, why would I take incremental positions in the dollar?”
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