Congress Holds the Dollar Hostage

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With only 5 more days to go before a potential shutdown of the U.S. government, the clock is ticking and investors are getting nervous. The U.S. Senate is scheduled to vote on an emergency spending bill to finance the government around 12:30pm ET and the bill that includes the controversial health care law will then be passed to the House who meets over the weekend. House Republicans have vowed to change any bill that includes funding for Obamacare and will undoubtedly insert changes aimed at killing the plan. They will then pass the bill back to Senate who will only have 1 day to act before the October 1st deadline. As this deadline approaches investors are stepping up their sale of dollars on the growing concern that a government shutdown will undermine the quality of U.S. assets and lead to a retrenchment in U.S. growth. Rating agency Moody’s estimates that a 3 to 4 week government shutdown could shave as much as 1.4% off U.S. growth but this forecast may be overly pessimistic because a 2 week shutdown is expected to cut growth by only 0.3% – 0.5%. We are still hoping for an 11th hour deal but the prospects are growing dimmer by the hour as Congress holds the U.S. economy and the U.S. dollar hostage.

The dollar is trading lower against all of the major currencies this morning except for the Australian and New Zealand dollars. A number of Federal Reserve officials have spoken this week but most are nonvoting members of the FOMC. Today, all 3 of the Federal Reserve Presidents scheduled to speak are voters and therefore the market will be particularly sensitive to their comments. Considering that Evans, Rosengren and Dudley are doves we expect their comments to be negative for the dollar. Unfortunately this morning’s economic reports failed to help the greenback. Personal income growth accelerated to 0.4% from 0.2% but the increase was less than expected. Personal spending on the other hand rose 0.3% from 0.2%. These reports did not deviate from expectations by much and resulted in very little reaction in the greenback. The final University of Michigan consumer sentiment report will be released later this morning and while economists are looking for an upward revision, given the sharp decline in the Conference Board’s report, we believe there’s scope for a downside surprise.

Until the debt ceiling is raised or the fiscal showdown is postponed for a few months, we expect the dollar to remain under pressure. A lot or very little could happen over the next 5 days but we hope the consequence of holding the economy hostage is not lost amongst politicians and they will agree to a last minute deal that would drive a relief rally in the dollar.

Kathy Lien
Managing Director

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