Dollar weakens to two-year low amid concern on Fed

The dollar slid to a two-year low against the euro (FOREX:EURUSD) as concern that U.S. growth was hampered by a government shutdown earlier this month fueled bets the Federal Reserve will delay slowing its stimulus program until next year.

The greenback briefly cut losses against the yen and the European currency even as more Americans than forecast filed jobless-benefit applications last week. The euro trimmed a gain versus Japan’s currency after industry data showed manufacturing and services output in the currency bloc expanded this month less than forecast. Norway’s krone advanced after the central bank said the currency has weakened since its last policy decision and left its key interest rate unchanged.

“March, June 2014-zone tapering still remains intact,” Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, said of outlook for reducing Fed stimulus. The employment data “could have been worse, so there’s probably a little bit of dollar demand kicking it. At the same time, it’s going to do nothing to adjust tapering expectations.”

The dollar depreciated 0.3% to $1.3816 per euro at 9:30 a.m. New York time and reached $1.3825, the weakest since November 2011. It fell 0.1% to 97.30 yen after touching 97.16 yesterday, the lowest level since Oct. 9. Europe’s shared currency rose 0.2% to 134.43 yen.

The greenback may fall to $1.40 versus Europe’s shared currency by the end of year, Jones said in a phone interview.

Shutdown Impact

The partial U.S. government shutdown that began Oct. 1 amid a political deadlock in Washington over spending probably trimmed 0.25 percentage point from fourth-quarter economic growth and cost 120,000 jobs in October, President Barack Obama’s chief economic adviser said on Oct. 22.

The government reopened Oct. 17 after a last-minute deal funded operations through Jan. 15 and extended U.S. borrowing authority to Feb. 7, from Oct. 17, averting a potential default.

Initial jobless claims in the U.S. decreased by 12,000 to 350,000 in the week ended Oct. 19 from a revised 362,000 in the prior period, a Labor Department report showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for a decrease to 340,000. Applications in California remained elevated and analysts weren’t able to determine how many non-federal workers filed due to the government shutdown, a Labor Department spokesman said.

The Fed will delay tapering its $85 billion of monthly bond purchases until March, according to the median estimate of 40 economists surveyed by Bloomberg on Oct. 17-18. The central bank buys Treasuries and mortgage-backed securities to put downward pressure on long-term yields and spur growth, a move that tends to debase the greenback.

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