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New York - 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 initially will be lost because lawmakers can't agree on a budget, according to IHS Inc. A two-week shutdown could cut growth by 0.3 percentage point to a 2.3 percent rate, according to St. Louis-based Macroeconomic Advisers.
"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 Tuesday in a phone interview. Amundi has reduced bets the dollar will rise, according to Kwok.
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 Obama's National Economic Council, told Bloomberg News reporters and editors Tuesday 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 Tuesday on the first day of the shutdown, its biggest intraday drop in two weeks. The gauge has dropped 4 percent from this year's high of 1,054.48.
Currencies whose fortunes are linked to the commodities market such as the Australian dollar appreciated Tuesday, 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-based currency strategist at Royal Bank of Scotland Group Plc's RBS Securities unit, said Tuesday in a phone interview. "A government shutdown increases the risk that fiscal problems will prevent any job recovery from being substantial and sustainable."