Tuesday, October 1, 2013

Dollar goes to hell in a wheelbarrow on US government shutdown. Will it do lasting damage?

The news that no agreement could be reached politically in the US to avert a government shutdown was apparently taken quite well in Asian markets this morning. However, the European market, represented by Frankfurt initially, opened about one hour before the time of writing this report, and the Greenback is now “going to hell in a wheelbarrow”, to coin a phrase.

Where this will end is impossible to say. The remarks of Mr. Bernanke after the last FOMC meeting, when he specifically alluded to the risks inherent in just this eventuality, have perhaps made it a greater factor in market behaviour than would otherwise have been the case. In any event, it has well and truly placed tapering and the whole question of Quantitative Easing (QE) on the back burner.

Europe gives a good lead indication as to the direction of world markets but we still have the US to come. Will the dollar weakness be accelerated when the US comes to the table, or will there be profit taking?

The government shutdown will not last. The only real question is the amount of damage it will do to the economy, and our guess is that this will be transient at worst. In the short term one real casualty is likely to be the otherwise closely watched Non-Farm Payrolls report, which is due out on Friday. This will, most likely, not appear as a result of the government shutdown.

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