October 7, 2013 / 7:58 PM / 4 years ago

FOREX-Dollar falls, pressured by U.S. budget deadlock

* Boehner's uncompromising comments raise U.S. debt default
fears
    * Dollar index stuck close to eight-month low
    * Safe-haven yen rallies to near two-month high vs dollar

    By Wanfeng Zhou
    NEW YORK, Oct 7 (Reuters) - The dollar fell on Monday,
remaining near an eight-month low against a basket of
currencies, as the U.S. budget deadlock in Congress showed no
sign of breaking.
    Investors flocked to perceived safe havens like the yen and
the Swiss franc, driving the dollar to it weakest since
mid-August against the Japanese currency.
    As the U.S. government neared the second week of a shutdown
and an Oct. 17 deadline to increase the nation's borrowing limit
approaches, neither Republicans nor Democrats offered any sign
of impending agreement on either the shutdown or the debt
ceiling. Both blamed the other side for the
impasse. 
    Fears have grown that a prolonged stalemate could hurt the
fragile economic recovery and could compel the Federal Reserve
to delay trimming its bond purchases, which are dollar-negative.
    "The Japanese yen may continue to appreciate against its
U.S. counterpart as the fiscal drag pushes the FOMC to delay its
exit strategy," said David Song, currency analyst at DailyFX in
New York. "As a budget deal fails to surface, the deadlock in
Congress may encourage the Fed to retain its current policy
throughout the remainder of the year, and the dollar remains at
risk of seeing further weakness over the near-term." 
    The dollar index fell 0.2 percent to 79.952, not far
from an eight-month low of 79.627 hit on Thursday.
    The dollar fell to as low as 96.79 yen, its lowest
since Aug. 12, before recovering to 96.90 yen, down 0.6 percent
on the day. 
    Traders cited support at 96.67 yen, its 200-day simple
moving average. Reported large option expiries at 96.50 yen and
96.75 yen could keep the pair close to its current levels. The
dollar was also just in oversold territory against the dollar
with a 14-day exponential relative strength index reading of
28.541.  
    Osamu Takashima, chief FX strategist at Citigroup Global
Market Japan in Tokyo, said there was a risk of the pair falling
further.
    "If the dollar falls to around 95 yen, under-hedged Japanese
exporters may try to sell the dollar, further accelerating the
dollar's fall."
    The dollar fell 0.4 percent to 0.9038 Swiss franc,
slipping toward Thursday's low of 0.8965, the lowest since late
February 2012.  
    The euro rose 0.1 percent to $1.3577, not far from
Thursday's eight-month high of $1.3645. The euro's rise was much
of the reason for the decline in the dollar index. 
    Some analysts said the dollar's losses have been limited so
far as investors still hope that politicians will find a
last-minute resolution to avert a disastrous debt default. 
    The last big confrontation over the debt ceiling, in August
2011, ended with an eleventh-hour agreement under pressure from
shaken markets and warnings of an economic catastrophe if a
default were allowed to occur. A similar, last-minute resolution
remained a distinct possibility this time, as well.
    The dollar's status as a safe haven has also been undermined
by expectations that any damage done to the U.S. economy would
be countered by the Fed sticking to its stimulus.
    Jane Foley, senior currency strategist at Rabobank in
London, said, "there is some opinion in the market that the
dollar's status as a safe haven will eventually win the day."
During past debt ceiling negotiations, the dollar had stayed
directionless and managed a relief rally once compromises had
been made, she said. 
    "Near term, we expect the dollar index to retain a downside
bias based mainly on the perception that the Fed could decide
that delaying tapering (of quantitative easing) is necessary to
protect the economy from any negative fallout from the impasse."

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