Dollar Falls as U.S. Government Shutdown Looms; Yen Erases Gains

The dollar fell against the majority of its most-traded peers as political wrangling about the U.S. budget threatened a partial government shutdown tomorrow.

The U.S. currency pared declines as three economic reports showed business activity expanded more than forecast. The yen erased its rally versus the dollar even with Congress deadlocked and a decision on raising the debt ceiling needed within three weeks. The euro gained as Italian Prime Minister Enrico Letta’s deputy finance chief expressed confidence in preventing the government from collapsing. The Australian dollar was unchanged versus the greenback before Reserve Bank of Australia officials meet.

“Markets are in the risk-off mode with the possible government shutdown in the U.S. and political uncertainty in Italy,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “The dollar has not been not playing the safe-haven role through this latest period I think because throughout the year the dollar tended to trade more positive with risk than negatively.”

The Bloomberg U.S. Dollar Index, which tracks the performance of a basket of 10 leading global currencies against the dollar, fell for a second trading-day, declining 0.1 percent to 1,011.85 at 5 p.m. New York time, after weakening as much as 0.2 percent.

Market Prices

The yen was little changed at 98.30 per dollar after touching 97.50, the strongest since Aug. 29. Japan’s currency fell 0.1 percent to 132.93 versus the euro after appreciating to 131.38, the strongest since Sept. 9. The euro was little changed at $1.3527.

The dollar’s share of allocated central bank reserves increased to 61.9 percent in the second quarter from 61.5 percent a year ago, according to International Monetary Fund data. The ratio for the yen slipped to 3.8 percent from 3.9 percent, while the euro’s share declined to 23.8 percent from 25 percent.

The Canadian dollar’s share increased to 1.8 percent in the second quarter from 1.6 percent in the first three months of the year, IMF data show. For the Australian dollar, it rose to 1.7 percent from 1.6 percent.

The New Zealand dollar gained 7.4 percent versus the greenback this month, while yen fell 0.1 percent.

This quarter, the kiwi led all major gainers with a 7.3 percent increase, while the worst-performing South African rand has slipped 1.5 percent. Denmark’s krone is the best-performing currency in 2013 and the rand has plunged 15.5 percent.

Aussie Move

RBA Governor Glenn Stevens and his board will keep the cash rate at a record-low 2.5 percent, according to all 33 economists surveyed by Bloomberg News. The Australian dollar was unchanged, after four days of gains, at 93.17 U.S. cents.

Brazil’s central bank increased its 2014 inflation forecast as a weaker currency undermines the world’s biggest interest rate increase. The real gained 1.6 percent to 2.2170 per dollar.

The U.S. Congress has one day to end a stalemate that raises the risk of the first government shutdown in 17 years and threatens talks to increase the debt limit.

Failure to approve funding to keep the government open and to raise the debt ceiling would have a destabilizing effect on the economy, President Barack Obama said in a televised statement on

Sept. 27. Closing the government would cut fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, according to economists from Moody’s Analytics Inc.

to Economic Outlook Group LLC.

Uncertain Conditions

“There are so many uncertain factors ahead of us, it’s no wonder that risk is off,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “We are seeing the usual pattern with a stronger Swiss franc, yen, and if anything the dollar very much on the defensive.”

The MNI Chicago Report business barometer rose to 55.7 in September from 53 the prior month. Numbers greater than 50 signal expansion. The median forecast of economists surveyed by Bloomberg was 54.

The Dallas Fed’s manufacturing gauge jumped to 12.8, versus a Bloomberg poll’s projection of 5.5 and a reading in August of 5. The Institute for Supply Management’s Milwaukee index rose to 55, versus a forecast of 50 and an August reading of 48.2.

Italy’s Letta said he will ask for a vote of confidence on Oct. 2, speaking on Rai 3 television. The Italian government has been torn apart by legal troubles facing former leader Silvio Berlusconi, whose criminal tax-fraud conviction subjects him to expulsion proceedings in parliament. Berlusconi allies have said they planned to quit the cabinet.

Italy Vote

“We think he’ll survive the no confidence vote and keep the government going.” BNP Paribas’s Serebriakov said. “It’ll still be a weakened, but that’s our base case.”

Europe’s common currency slipped as much as 0.3 percent to 1.2214 per franc, the weakest since May 3, before trading at 1.2239.

The yen strengthened before Japanese Prime Minister Shinzo Abe is due to outline his plans tomorrow for taxes and an economic-support package. Japan is set to raise its sales tax next year for the first time since 1997, and Abe may introduce a stimulus plan to offset the resulting drag on growth.

An increase in sales tax may spur yen gains unless balanced by measures to support growth, said Stan Shamu, a market strategist at IG Ltd. in Melbourne. “Talk of an urgent call for a corporate tax cut has been suddenly quashed,” he said.

Trading in over-the-counter foreign-exchange options totaled $19.7 billion, compared with $29 billion on Sept. 27, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $5.4 billion, the largest share of trades at 27 percent. Options on the dollar-yuan rate totaled $2.1 billion, or 10.6 percent.

Dollar-yen options trading was 78 percent more than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Dollar-yuan options trading was 115 percent more than average.

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