Dollar Falls in Longest Streak Since June as U.S. Shutdown Looms

The dollar fell in the longest stretch since June as traders weighed whether the economy is strong enough to warrant a reduction in monetary stimulus and as political budget wrangling threatened a government shutdown.

The yen rallied the most against the dollar of its 16 major peers as comments from Finance Minister Taro Aso damped bets the government will cut corporate taxes. A basket of emerging-market currencies fell. The Labor Department may report Oct. 4 that private payrolls increased by 180,000 this month. Investors are assessing those figures after the Federal Reserve surprised the markets on Sept. 18 by maintaining its $85 billion in monthly bond purchases.

The dollar “entered the week on its back foot in response to the Fed’s surprise move the week before,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “In addition to mixed data we’ve seen on the economy, these headwinds on the recovery, investors grew even more skittish at the specter of a U.S. government shutdown.”

The Bloomberg U.S. Dollar Index, which tracks the performance of a basket of 10 leading global currencies against the dollar, fell 0.1 percent this week to 1,012.75 in New York. It reached 1,006.40 on Sept. 19, the lowest level on a closing basis since Feb. 20.

The U.S. currency was little changed at $1.3522 per euro. The greenback gained 1.1 percent to 98.24 yen. Japan’s currency added 1.1 percent to 132.86 versus Europe’s 17-nation common tender.

Market Measures

The New Zealand dollar has gained 7.1 percent versus the greenback this month, while the yen has declined 0.1 percent.

This quarter, the kiwi has led all major gainers with a 6.9 percent increase, while the worst-performing South African rand has slipped 2.1 percent. Denmark’s krone is the best-performing currency in 2013 and the rand has plunged 16 percent.

Hedge funds and other large speculators betting on a rise in the U.S. dollar against currencies traded on the CME Group Inc. reduced net positions this week to the lowest since April, according to data from the Washington-based Commodity Futures Trading Commission compiled by Bloomberg. The cumulative net speculative dollar longs, in the CME Group’s Japanese yen, euro, Swiss franc, British pound, Mexican peso, Australian, New Zealand and Canadian dollar contracts, fell to 38,471 in the week ended Sept. 24, the least since April 30.

The yen rallied for a second week as Aso told reporters that funding sources would be needed if corporate tax rates were to be reduced. Kyodo News reported yesterday that the government of Prime Minister Shinzo Abe had pledged to begin a study on cutting the levy.

Japan Policy

“The market is obviously looking at the comments by minister Aso,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “That, along with the risk-aversion mentality we’re seeing trading into quarter-end, partly because of the U.S. shutdown risks, are keeping dollar-yen relatively subdued and biased to the downside.”

Bank of England Governor Mark Carney told the Yorkshire Post that officials would consider expanding its asset-purchase target, known as quantitative easing, should the economic recovery falter.

“Given the recovery has strengthened and broadened, I don’t see a case for quantitative easing and I have not supported it,” he said, according to the newspaper.

The pound increased for a fourth-week to $1.6139 after climbing to $1.6163 on Sept. 18, the highest since Jan. 11.

The dollar has shown surprising strength since the Fed decided not to trim monthly asset purchases, according to David Woo of Bank of America Corp.

Economic Pickup

“The market is still pricing in a pretty sharp pickup in growth,” Woo, the global head of rates and currencies in New York at Bank of America Merrill Lynch, said in an interview yesterday on Bloomberg Radio’s “Surveillance” with Tom Keene and Scarlet Fu. “The price action is not sustainable. What it’s telling me is there’s a lot of complacency out there.”

The unemployment rate this month was unchanged at 7.3 percent from August, according the median forecast of 50 economists surveyed by Bloomberg. While the jobless rate declined last month to the lowest since December 2008, it happened as workers left the labor force.

Fed Chairman Ben S. Bernanke cited Bernanke cited the declining share of the population in the labor force as a policy consideration during the last Federal Open Market Committee meeting, after which they kept their stimulus program unchanged. The central bank chief also listed the need to protect the economy from the budget impasse in Washington as a reason for keeping its quantitative easing measures unabated.

Twenty-four of 41 economists surveyed Sept. 18-19 said the Fed will now wait until December before taking the first step in slowing its $85 billion in monthly bond purchases, according to a Bloomberg survey.

Congress Votes

The Senate voted yesterday to finance the government through Nov. 15 after removing language to choke off funding for the health care law, putting pressure on the House to avoid a federal shutdown that may start Oct. 1. Treasury Secretary Jacob J. Lew told Congress that the extraordinary measures being used to avoid breaching the debt ceiling “will be exhausted no later than Oct. 17” and that the department will have about $30 billion to pay obligations.

“Elevated uncertainty toward the dollar should keep it well below its recent highs,” Western Union’s Manimbo said. “Investors might tread a little carefully with the greenback ahead of next week’s payrolls number.”

An equally weighted basket of so-called BRICS emerging-market currencies fell, snapping a three week rally. BRICS refers to Brazil, Russia, India, China and South Africa.

“Most EM currencies have given up all of their post-FOMC gains,” Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, wrote Sept. 27 in a note. “This fits in with our view that the FOMC decision to delay tapering will continue to weigh on EM FX.”

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