Dollar Slips as Fed Worries ContinuePosted: October 18, 2013
Expectations that the Federal Reserve will have to keep its easy-money policies in place for longer following the partial U.S. government shutdown pushed the dollar close to its lowest point of the year against the euro and U.S. Treasury debt prices to their highest point since July.
Yields on the 10-year Treasury note, which move inversely to prices, were down to 2.55%, while the dollar continued its slide against the euro, which rose to $1.3695 from $1.3675 late Thursday in New York, edging closer to this year’s high of $1.3711 reached on Feb. 1. The dollar fell further against the pound, which traded just above the $1.62 level for the first time in two weeks, and resumed its drop against the yen, fetching ¥97.65 from ¥97.93.
About three hours before the start of trading, U.S. futures pointed to a relatively subdued open on Wall Street, where stocks staged a late-session comebackThursday that helped push the S&P 500 to a record close of 1733.15. The front-month contracts for the Dow Jones Industrial Average and the S&P 500 were both up 0.1%, at 15331.00 and 1729.80, respectively. Changes in futures don’t always accurately predict early market moves after the opening bell.
The drop in the dollar and the rise in Treasury debt prices were set in train earlier this week after lawmakers reached a temporary solution to raise the so-called debt ceiling, showing that investors doubt the Fed can start to reel in its stimulus measures—a process dubbed tapering—for as long as economic performance and data is compromised by the now-ended shutdown, and as long as the risk of repeat shutdowns lingers.
“As policy remains uber accommodative, the dollar has adjusted downwards,” said Scott Jamieson, head of multi-asset investing at Kames Capital in London, with $24 billion under management.
“While we have been inclined to see tapering next year, the market is only now coming to appreciate this,” said analysts at Brown Brothers Harriman. “After the September disappointment, surveys suggest that a majority shifted their expectations to December. Now in light of the fiscal drag and new uncertainty, the mid-January and mid-February limits on spending and debt issuance will loom large at the December Federal Open Market Committee meeting, and likely reduces the possibility of tapering then. The focus is likely to shift to the March 2014 FOMC meeting for the first tapering,” they said.
European stocks edged higher, supported by the late bounce in the U.S. and encouraging Chinese growth figures.
Now that Congress has temporarily approved a bill to raise the debt ceiling, attention is likely to shift back to earnings and fundamentals. And as investors reassess their expectations for any withdrawal of stimulus from the Fed, all eyes will be on the economic data that was delayed by the partial government shutdown. The next focus will be September’s nonfarm payrolls report, which is due on Oct. 22.
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