Dollar hits 8-month low on US govt shut down

The first U.S. government shutdown in 17 years weakened the dollar on Tuesday, sending it to an eight-month low against the euro, but met a subdued response from investors in equity and fixed income markets.

U.S. Federal government agencies have been directed to cut back services after lawmakers failed to pass a temporary spending bill before a midnight deadline, threatening the salaries of over a million workers.

"No one really knows when they are going to get their act together, so you would have thought there would have more of a reaction than there has been," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.

The dollar has borne the brunt of the response so far, falling to a 1-1/2 year low against the safe-haven Swiss franc and hitting an 8-month low against a basket of six major currencies. The weakness lifted the euro to an eight-month high of $1.3589.

However, MSCI's world equity index, tracking shares in 45 countries, gained 0.15 per cent by early European session, though it saw its biggest daily fall of September on Monday as investors anticipated the shutdown.

Europe's broad FTSEurofirst 300 index inched 0.2 percent higher after the open but held near a three-week low.

U.S. stock index futures also pointed to gains when Wall Street opens later in the with the broad S&P stock futures inched up 0.5 per cent after cash prices fell on Monday.

"The U.S. shutdown is a central point for the markets, but as long as the hope for just a temporary shutdown exists, it will not be a strong burden for equities," Christian Stocker, equity strategist at UniCredit said.

Markets were also absorbing the mixed readings on economic activity across the manufacturing sector for September.

Euro zone factory activity grew for the third month running in September as demand enabled picked up. While activity in China expanded only slightly last month raising questions over the strength of its nascent recovery.

DEBT FLAT

In fixed income markets, German government bond yields, normally seen as a safe haven by investors in times of uncertainty, were steady though yields on U.S. Treasury 10-year notes did rise to hit 2.645 percent, a gain of three basis points.

Gold, another traditional safe haven asset, did pop higher after the shutdown became apparent, hitting $1331.66 an ounce, though it is trading well within its recent $1,300 to 1,350 range.

While many market players expect the government shutdown, which in the past has lasted from one day to nearly a month, to ultimately be resolved, they are more fearful about implications for debt ceiling negotiations due later this month.

"People will start to think the deadline for the debt ceiling, which is around the October 17, is not going to be met in that case there is a risk of a default," Eric Chaney, chief economist at AXA Group, said.

Any likelihood of that the U.S. government is going have problems servicing its massive debt is likely to hit equity market hard though it would raise expectations the Federal Reserve will keep its monetary stimulus in place for longer.

Elsewhere Italian bonds were also broadly steady a day before Italian Prime Minister Enrico Letta faces a vote of confidence as Italy tries to draw a line on growing political tensions.

The yield on the benchmark 10-year Italian government bond was up one basis point at 4.58 percent.

Meanwhile Brent crude fell below $108 a barrel to trade near a 7-week low on worries that the shutdown of the U.S. government may crimp oil demand.

Brent crude for November fell 70 cents to $107.67 a barrel. U.S. crude was at $101.99, down 34 cents.

Copyright Thomson Reuters 2013