Forex-dollar On Pace For Weekly Gain On Optimism About Debt Deal

Failure to break the stalemate before Thursday, the deadline to raise the debt ceiling, would leave the world’s biggest economy unable to pay its bills in the coming weeks, potentially having a catastrophic impact on financial markets. “The markets went home on Friday expecting a deal would be imminent. While there’s a heap of conciliatory language around, there’s no deal yet,” said Sam Tuck, currency strategist at ANZ Bank in Auckland. “Now that we’re in the week where the debt ceiling will be hit, the yen’s gaining on safe-haven bids.” Traders said bids for the U.S. dollar at levels near 98.00 yen helped to limit the yen’s rise. Analysts said market players were also probably wary of tilting bets too heavily in one direction, given the possibility of a last-minute deal to raise the U.S.

The absence of economic releases is making it that more difficult for traders and investors alike to get a better handle on what is actually occurring in the worlds biggest economy. The lack of data releases leads one to believe that the near-term prospect for the USD remains highly uncertain. In the event of a resolution to the government shutdown, dealers and investors will be expecting the greenback to strengthen marginally against low yielding currencies such as JPY, EUR, and GBP. At the same time, the likely risk-on reaction would bias the USD lower against emerging market currencies. However, an extended shutdown will surely bring risk-aversion position trading back in style in spite of the dovish impact on the Federal Reserves tapering plans. This article is for general information purposes only.

Market holidays in Japan and partial market closure in the United States on Monday added to the subdued mood. “I think people are kind of in limbo… A bit fearful but hopeful as well that something can be done before the deadline,” said Sim Moh Siong, FX strategist for Bank of Singapore. Low risk sentiment and worries about China’s economic strength weighed on growth-linked currencies like the Australian dollar. Data released on Saturday showed export growth in China, Australia’s top export market, fizzled in September to post a surprise fall.

Here is an outlook on the major market-movers coming up. The ongoing battle between Democrats and Republicans continued last week reducing chances for a debt crisis resolution. An intervention by central banks cannot be ruled out. However minutes released from the last FOMC meeting revealed tapering decision was quite close. Many FOMC members suggested partial tapering in light of the strong economic data release a while back but recent releases before the meeting raised fresh concerns among the policy makers regarding tapering therefore a dominant majority decided not to taper the Feds monthly purchases of mortgage-backed securities. Will a debt crisis resolution hoist the US economy back on track?

“The ongoing fiscal drag would, in turn, likely keep the Federal Reserve from scaling back its monetary easing further into 2014.” The dollar index, which tracks the greenback against a basket of six major currencies, slipped 0.1 percent to 80.352. It’s on pace for a gain of 0.3 percent this week, the first weekly rise since early September. Options investors are curbing bets that profit from a stronger dollar, with one-week euro/dollar risk reversals showing options investors sought the smallest protection against the euro’s depreciation since January. One-year risk reversals show demand for euro puts, the right to sell the euro at a future date, at its smallest since April. The dollar rose 0.2 percent to 98.36 yen, having hit a session peak of 98.55 yen, according to Reuters data, the highest since Oct. 1.

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