Dollar falls on worries over possible US government shutdown

  • Bit to keep US govt open stokes anti-dollar mood
  • Euro hold below 3-year peak versus greenback
  • Evidence of reserve diversification drags on dollar
Dan Kitwood | Getty Images

The U.S. dollar fell on Thursday as traders piled into the euro, yen, sterling and other major currencies amid concerns over a possible U.S. government shutdown as lawmakers struggled to cobble together a federal budget deal.

If an agreement to fund government operations, even a temporary one, is not reached by the Friday deadline, it would compound an already-negative climate for the greenback, analysts said.

"Politics are sabotaging economics," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. "It's the uncertainty about the U.S. budget deal. We are going to see further pressure on the dollar if there isn't a deal."

Republican lawmakers are scrambling to pass a temporary measure to keep the government open. A House vote on the funding extension is expected after 2:30 p.m.

The dollar index was last up 0.03 percent at 90.57. It held above a three-year low of 90.104 touched on Wednesday.

The euro hovered below its three-year peak against the greenback. It was up 0.39 percent at $1.2234.

The dollar was down 0.17 percent at 111.09 yen, while the pound was up 0.41 percent at $1.3881.

The greenback reversed gains from late Wednesday after Apple said it would make about $38 billion in one-time tax payments on its overseas cash holdings, though analysts expect the impact on currency markets is going to be limited.

Reverse diversification

The dollar has fallen since 2017 largely on expectations central banks besides the Federal Reserve are seeking to end the extraordinary measures they adopted to combat the 2008 global financial crisis and the recession that followed.

Another factor analysts are attributing to the greenback's weakness is that global investors, including sovereign wealth funds and central banks, are looking to diversify their dollar holdings into other currencies. China and Japan, the two largest foreign U.S. creditors, cut their Treasuries holdings in November. An analysis of the quarterly data published by the International Monetary Fund of the currency composition of the worlds foreign exchange reserves held by global central banks showed that reserve managers were increasing the pace of adding non-dollar based currencies to their reserves.

BNY Mellon strategists said the increase in holdings of pounds and euros in global central banks' reserves over the three quarters ending September 2017 came at the expense of reduced allocation into U.S. dollars.