The U.S. dollar continued to trade lower against all of the major currencies this morning with the exception of the Japanese Yen. While the lack of big moves in the FX market suggests that traders are twiddling their thumbs ahead of FOMC meeting, extension in pairs such as the AUD/USD and NZD/USD reflect hesitation about holding dollars. According to positioning data, the market is still very long dollars and the risk of disappointment this week is high. Unfortunately the dialogues in Washington are not helping the greenback.

Not only is the Fed’s move on Wednesday expected to be inadequate, but reports that the White House wants to take more time to decide on who to nominate for Fed Chairman raises fresh concerns. As the clear front-runner, choosing Janet Yellen should be a no brainer for President Obama and he should be able to make the announcement by the end of this week or the beginning of next week at the latest. She’s been the more palatable choice for the Senate all along, has deep experience with guiding monetary policy, was a key architect of Quantitative Easing, an advocate of forward guidance and a keen economist with deep understanding of the pressures in the economy and the consequences of monetary policy. However concerns about her leadership style and lack of a deep working relationship with Yellen could be some reasons why the Obama Administration is hesitating. In general, President Obama prefers team players and Yellen is more of an activist and a leader that urged her counterparts at the Fed including Bernanke to share her views.

At the same time, talk about the debt ceiling and potential government shutdown is also gaining traction this morning on the back of comments from Treasury Secretary Jack Lew who said Congress should not wait until the eleventh hour to raise the debt ceiling. For the past 4 months, the U.S. government has been using emergency measures to avoid breaching the $16.7 trillion debt ceiling and based on the current level of spending, the government could run out of cash by October and this could force a government shutdown in late September. The last time the U.S. government was officially shut down was 1995 to 1996. A standoff between Democrats and Republicans shuttered the government during the Clinton Administration for 5 days in November 1995 and then for 21 days between December 15 and January 6th. In both cases the Dollar Index dropped more than 0.65% before recovering quickly once federal offices were reopened. So FX traders shouldn’t be overly concerned about a government shutdown because the impact on the dollar is expected to short-lived.

Finally, the main focus is of course the Federal Reserve’s monetary policy decision and we will dedicate our afternoon note to the Fed meeting. This morning’s consumer price report confirmed that inflationary pressures in the U.S. are virtually nonexistent so if the central bank wants to keep monetary policy at its current levels, they can. CPI growth slowed to 0.1% in the month of August from 0.2% with year over year gains dropping to 1.5% from 2.0%. Annualized core prices grew slightly faster but are still running at very low levels. Housing market activity held steady September but only after the August NAHB housing market index was revised down from 59 to 58. According to the Treasury, foreign purchases of U.S. assets increased in July with demand for Treasuries rising by $31.1 billion, up from sales of $67 billion the prior month. Japanese investors were the biggest buyers, accounting for $52 billion in demand.

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