October 18, 2013 9:01 am

Dollar pressured by Fed taper delay talk

A resolution of debt talks in Washington has only added to pressure on the dollar this week, as investors begin to assess the economic impact of the government shutdown.

The dollar fell against all major currencies on Thursday and Friday and the dollar index – the US currency’s value measured against a basket of six major rivals – was down nearly 1 per cent on the week.

Its slide reflected expectations that the Federal Reserve will now delay a tapering of its stimulus programme until the next round of US debt ceiling discussions have been resolved early next year. Meanwhile, the shutdown has not only hit economic activity, but also disrupted data collection and made it harder for the Fed to ascertain the speed of a recovery.

However, Jens Nordvig, strategist at Nomura, said weakness against major currencies also suggested that “some investors are clearly thinking about whether the dollar needs a political risk premium attached to it”.

Other reserve currencies were among the beneficiaries, with the euro up 1 per cent against the dollar over the week at $1.3684, the Swiss franc up 1.2 per cent at SFr0.9017 and sterling – buoyed also by unexpectedly strong retail sales data – up 1.4 per cent at $1.6184.

Analysts expect the prospect of looser Fed policy for longer will also fuel appetite for higher yielding “carry” currencies and help to stabilise the currencies of emerging markets with big current account deficits that have come under pressure.

The Australian dollar hit a four-month high against its US counterpart, reflecting improving economic data from China, its main export market, and suggestions that the central bank is not considering further cuts in interest rates. The Aussie’s performance over the past six months remains the weakest of any G10 currency but it has now rallied some 5 per cent from an August trough.

Emerging market currencies that have performed strongly since the start of the US government shutdown include the South African rand, which has gained 2.7 per cent against the dollar since October 1, and the Brazilian real, up 2.6 per cent.

The renminbi traded close to a record high against the dollar for much of the week, with investors speculating that the Chinese authorities’ willingness to let it appreciate might prefigure further steps to liberalise capital controls – in particular, a widening of the band within which the renminbi is allowed to fluctuate.

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