Dollar drops as U.S. debt limit spurs safety demand

The dollar (NYBOT:DXZ13) sank to its weakest level in eight weeks against the yen amid concern U.S. lawmakers will fail to reach an agreement on raising the debt ceiling needed to avoid the first American default.

Switzerland’s franc rose versus the greenback after House Speaker John Boehner said the U.S. may fail to meet its obligations unless President Barack Obama negotiates. The euro gained versus most major peers even as investor confidence in the 17-nation region waned. The Indian rupee fell as the Reserve Bank of India made its second interest-rate cut in a month.

“There were some expectations that Washington would get a bit closer to a deal over the weekend, and markets may be disappointed more progress wasn’t made,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said in a phone interview. “This is weakening the dollar amid risk aversion.”

The dollar lost 0.4% to 97.08 yen at 10:12 a.m. New York time, after touching 96.81, its weakest level since Aug. 12. The Japanese currency added 0.4% to 131.62 per euro. The franc appreciated 0.2% to 90.57 centimes per dollar. The euro rose as much as 0.2% to $1.3591 before trading at $1.3560.

The yen tends to strengthen during periods of financial and economic turmoil because Japan isn’t reliant on foreign capital to fund its deficits. The Japanese currency is close to strengthening beyond its 200-day moving average for the first time since November. The measure is currently at 96.68.

Currency swings as measured by the JPMorgan Global Volatility Index fell to as low as 8.76 on Oct. 4, the least since May 9. It was 8.85 today, versus a 2013 average of 9.38.

Rupee, Pound

India’s rupee declined versus all of its 31 most-traded counterparts as the nation’s central bank cut an interest rate, taking advantage of a recent climb in the rupee to ease a cash squeeze imposed to support the currency. It slid 0.6% to 61.7950 per dollar after falling 0.8%, the most on an intraday basis since Sept. 20, to 61.9550.

Sterling gained versus most of its major peers after a report showed optimism in the U.K.’s financial industry reached a 17-year high in the third quarter, underlining the strength of the British economy. Sterling climbed 0.5% to $1.6082 after increasing 0.6%, the most since Sept. 27.

New Zealand’s dollar fell versus the greenback as the country’s finance minister, Bill English, said the currency remains too strong and is hampering exports. The kiwi decreased 0.1% to 83.11 U.S. cents. It has gained 3.9% against its American counterpart in the past month.

‘Too High’

“The exchange rate, in our view, is still too high,” English said in Wellington after the Treasury published financial statements for the year through June. “It remains a headwind for the export sector.”

U.S. Treasury Secretary Jacob J. Lew renewed his call for extending the nation’s debt limit to avoid a default.

“If the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default,” Lew said yesterday on CNN. “Congress is playing with fire.” The government shutdown entered a seventh day after lawmakers failed to find an agreement on the budget.

The dollar will resume its advance after an accord on the debt ceiling is reached, gaining to between 100 yen and 105 yen by year-end, said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. The median forecast of analysts and strategists surveyed by Bloomberg is for the dollar to trade at 103 in December and 105 by the end of the first quarter.

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