The US dollar sagged to eight-month lows today as the US government shutdown dragged on with no end in sight, though stock markets found comfort in expectations major central banks might now have to stay super-loose for longer.
Also helping sentiment was an upbeat survey on China’s huge services sector, an antidote to a disappointing report on manufacturing earlier in the week.
MSCI’s broadest index of Asia-Pacific shares outside Japan moved 0.8 per cent higher, after a flat performance yesterday.
Japan’s Nikkei recovered early losses to be steady on the day, while Australian shares added 0.7 per cent.
A meeting between US president Barack Obama and congressional leaders produced nothing but blame and counter-blame, dimming hopes of an early end to the budget impasse.
So far, investors have been wagering that a deal would be reached in time to avoid lasting damage to the economy, although another fight over the debt ceiling still looms.
The ceiling is far more important than the shutdown since it could lead to an unprecedented default by the United States, an outcome the market assumes is unthinkable.
“To the extent that we have never been in a situation where the debt ceiling has not been raised, there is a high degree of uncertainty over how events will transpire,” said Elliot Clarke, an economist at Westpac in Sydney.
“That said, what is plainly evident is that a protracted stalemate would have a significant impact on the US economy.”
Already one effect has been to further cloud the outlook for when the Federal Reserve will start scaling back its asset-buying programme.
Eric Rosengren, head of the Fed Bank of Boston, said yesterday that the government shutdown could further delay a tapering because of a lack of official data on the economy.
That only amplified the startling swing in market thinking about the future course of US interest rates.
Just a month ago, the futures market had predicted the Fed funds rate would be up around 1.465 per cent by the end of 2015. Now it implies a rate of just 0.745 per cent.
That in turn has helped drag yields on the benchmark 10-year US Treasury note down to 2.62 per cent, from a September peak of 2.99 per cent.
In contrast to the increasingly dovish outlook for US rates, the European Central Bank (ECB) yesterday left interest rates unchanged and gave no hint it was considering further easing.
The dollar’s diminishing yield advantage saw it peel off to a fresh eight-month trough against a basket of currencies at 79.740. The euro in turn climbed to an eight-month high at $1.3625, bringing in sight the 2013 peak of $1.3711.
The dollar did gain some traction on the yen, but only because Japanese investors were selling their currency for euros. Thus while the dollar steadied at 97.54 yen, the euro rose more than half a yen to 132.82.
A notable mover was the New Zealand dollar, which rallied after the Reserve Bank of New Zealand said larger increases in interest rates would be needed if new limits on mortgage lending fail to cool the country’s housing market.
The kiwi jumped to $0.8300, pulling well away from a low of $0.8194 plumbed yesterday.
Trading was very choppy in commodity markets, though the lower dollar tended to support prices. Gold steadied at $1,311.79 an ounce, having bounced from a low of $1,278.24 yesterday. Copper futures held their gains to stand at $7,273.55 a tonne.
Oil prices edged off after a jump yesterday. Brent crude for November eased 27 cents to $108.92 a barrel, while US crude slipped 44 cents to $103.66. (Reuters)
