The U.S. dollar is trading higher this morning against the euro and British pound but the greenback remained under pressure against the Japanese Yen, Australian and New Zealand dollars. FX traders bought dollars during the European session on the hope that the Senate will announce a deal to raise the debt limit and end the government shutdown over the next 24 hours. Yet there is little consistency in the performance of the greenback because investors know that the greatest resistance for the Senate is with the House and not inside their own chambers. In order for Congress to get to the finish line, both the Senate and House have to sign the bill and with 2 days to go before the U.S. reaches its borrowing limit, it is still not clear if conservative House Republicans will support the bill. We can’t forget that to date, the House has sent back all shutdown related bills passed by the Senate but the difference is that we are rapidly approaching the October 17th deadline and the pressure on politicians has intensified significantly.

For the most part, investors are taking the developments in Washington in stride with equities, currencies and Treasuries holding steady. At this stage anything can happen. If Congress manages to fast track a bill, the dollar could rise sharply in relief but if it looks like the U.S. government will incur a technical default, the dollar could extend lower against the Yen and give up its gains against euro and sterling.

Meanwhile this morning’s economic reports confirm that the Federal Reserve has very little leeway to reduce stimulus by tapering asset purchases this year. According to rating agency Moody’s the government shutdown has so far cut $20 billion off U.S. GDP. Manufacturing activity in the NY region is also suffering from lower business confidence as the Empire State manufacturing index dropped to 1.52 from 6.29, its lowest level in 5 months. The bulk of the weakness was in prices, delivery time and hiring. The sharp rise in new orders confirms that the slowdown in activity can be attributed to uncertainty rather than significant weakness in the U.S. economy. On the consumer level, the International Council of Shopping Centers also reported a 0.7% drop in chain store sales for the week ending on Saturday but they still expect same store sales to rise between 3 to 4% this month compared to 3.5% growth in September. Earnings have also been mediocre with Citigroup results falling short of expectations.

All eyes will remain on Washington today and as we don’t expect the Senate and the House to approve a spending bill by the end of the North American session, we expect cautious trading in currencies.

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