NEW YORK (MarketWatch) — The U.S. dollar fell to its lowest level against the Japanese yen in nearly two months on Monday, as Democrats and Republicans stood their ground on opposite sides of the budget debate and the government shutdown stretched into its second week.
Trading on Monday was marked by “outperformance of safe-haven assets in general,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc. The “continued stalemate” will particularly hurt the dollar against the yen and Swiss franc, he said.
President Barack Obama said Monday there are enough votes in Congress to pass a “clean” bill to raise the debt limit, contradicting remarks from House Speaker John Boehner. On Sunday, Boehner said he wouldn’t bring funding or debt-limit bills to the House floor unless they were linked to broader deficit talks, a marked shift from previous news reports that said he would avoid a default. Treasury Secretary Jack Lew said Sunday that Congress is “playing with fire” if it doesn’t raise the debt limit by Oct. 17, after which the U.S. wouldn’t be able to borrow money to pay its bills.
The dollar USDJPY +0.33% fell to ¥96.77 from ¥97.41 late Friday. That’s the lowest level since August 9’s closing price of ¥96.226, according to FactSet data. The yen gained in part from safe-haven flows resulting from concern about the U.S. budget debate. Another source of support has been the “slowing reform momentum” in Japan, said Thomas Stolper, chief foreign-exchange strategist at Goldman Sachs in London, who last week recommended a short position on the dollar-yen. A short position in this scenario is a bet that the dollar will decline against the yen.
“Abenomics seems to be a lot less proactive than it was a few months ago,” said Stolper, referring to the smaller-than-expected stimulus package to offset the sales-tax hike, the lack of easing at the most recent Bank of Japan meeting and labor-market reform news. Abenomics refers to Japanese Prime Minister Shinzo Abe’s economic policies that are designed to boost growth.
Abe told The Financial Times that reform to labor-market laws, which currently make it difficult to eliminate workers, could be delayed because of strong opposition.
While a prolonged government shutdown would hurt U.S. growth, the biggest shock to financial markets would be a failure to raise the U.S. debt limit by the Oct. 17 deadline.
“A higher risk of a U.S. sovereign default would lead to a flight to liquidity and, ironically, a stronger [U.S. dollar],” Barclays analysts wrote in a note Monday, referring to the U.S. dollar. But the bid for the dollar in that scenario wouldn’t help boost it against the “most liquid” and “safest-haven” currencies such as the euro, yen, pound and Swiss franc, they said.
The Pentagon has recalled most of its 400,000 civilian workers, which could help offset economic damage caused by the shutdown.
The pound GBPUSD -0.14% rose to $1.6091 from $1.6026 late Friday, and the dollarUSDCHF +0.27% bought 0.9030 Swiss franc in recent trade, down from 0.9066 franc late Friday.
The euro EURUSD -0.05% inched higher to $1.3577 from $1.3555.
“Because of the U.S. shock, the Fed might indeed respond in a more dovish way,” said Stolper of Goldman Sachs. A delayed timeline for reducing purchases would likely delay any hikes to short-term interest rates, which are currently near zero. “Low interest rates in the U.S. at the margin would be negative for the dollar,” he said.
