Dollar weakens as U.S. shutdown continues

The dollar traded at almost the lowest since February as a partial shutdown of the U.S. government boosted speculation the Federal Reserve will persevere with asset purchases that tend to weaken the currency.

The euro fell after touching its highest level against the greenback in almost eight months as political wrangling threatened to curb U.S. growth. Lawmakers still need to agree on raising the U.S. debt limit to avoid a default after Oct. 17. The yen rose as Japanese Prime Minister Shinzo Abe proceeded with a sales-tax increase and stimulus measures. Sweden's krona jumped as a report showed manufacturing expanded faster than economists predicted.

“The fact that the Fed's going to continue to expand its balance sheet and add to the U.S. monetary base relative to the rest of the world would tend to the be a negative for the dollar,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said in a phone interview. “You don't have a capital-flow story, you do have a relative-balance-sheet story working against the dollar. You look around and have to say, 'why would I take incremental positions in the dollar here?'”

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 to 1,011.32 at 10:51 a.m. New York time, after losing 2.8 percent last quarter, the most since 2010.

Market Levels

The U.S. currency was little changed at $1.3527 per euro after depreciating to $1.3588, the weakest since Feb. 6. The yen gained 0.1 percent to 98.14 per dollar and climbed 0.1 percent to 132.81 per euro.

The forint gained for a fourth day as data showed Hungary's manufacturing expanded at the fastest pace in six months. The currency appreciated 0.5 percent to 296.14 per euro.

Sweden's krona climbed 0.8 percent to 8.6286 per euro and was 1 percent stronger at 6.3652 against the dollar.

An index based on responses from about 200 purchasing managers rose to a seasonally adjusted 56 last month, the highest since May 2011, from 52.2 the previous month, Stockholm- based Swedbank AB, which compiles the data, said today. A reading above 50 indicates an expansion. It was seen declining to 52.1, according to the median estimate of eight economists surveyed by Bloomberg.

ECB Policy

European Central Bank President Mario Draghi said Sept. 23 he's ready to deploy another long-term refinancing operation to fund banks. The central bank is scheduled to announce its next policy decision tomorrow.

The Australian dollar rose after the central bank left interest rates unchanged and said earlier cuts are still filtering through the economy and boosting asset prices.

The Aussie jumped 0.8 percent to 93.93 U.S. cents, after reaching the biggest one-day advance on a closing basis since Sept. 18.

The U.S. current account deficit is forecast to narrow to 2.5 percent of gross domestic product next year from 2.6 percent in 2013, according to a Bloomberg survey. The euro area's 2 percent surplus is estimated to be unchanged in 2014, a separate survey shows.

This is the first U.S. shutdown in 17 years as House and Senate lawmakers failed to agree on a spending plan for the new fiscal year that started today. Chances of a last-minute deal evaporated as the House stood firm on its call to delay major parts of President Barack Obama's health-care law for a year. Senate Democrats were equally firm in refusing.

Destabilizing Effect

Fed Chairman Ben S. Bernanke and his colleagues at the Federal Open Market Committee decided last month to maintain their $85 billion-a-month bond buying program. Fed Bank of New York President William C. Dudley said on Sept. 27 that budget battles in Washington were among the risks to the outlook and he wanted to see more momentum in the economy before paring the pace of quantitative easing.

The Fed's balance sheet has ballooned to $3.7 trillion from $1.6 trillion five years ago.

“The market is anticipating that a shutdown means the Fed will also maintain its easy policy stance for longer because of the risks to the U.S. economy,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “We are seeing some strength in the European currencies and a bit of weakness in the U.S. dollar.”

Japan's sales tax will be raised to 8 percent in April from 5 percent, Abe said in Tokyo today. He said a 5 trillion-yen ($50 billion) economic support package would reduce the negative impact of the increase. The Bank of Japan is scheduled to announce its next policy decision on Oct. 4.

The yen has tumbled 10.6 percent this year, the worst performer of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 5.5 percent and the dollar gained 2.3 percent.