Dollar slumps as investors count cost of shutdown

A day after politicians in Washington finally came to an agreement, the market’s reaction has been somewhat muted.

All the excitement was contained to yesterday’s moves when the news was still breaking and the lack of fireworks today after the agreement was finalised suggests that the market was both expecting a deal and underwhelmed by the can being kicked down the road.

Depending on which analyst you listen to, the cost of the shutdown could vary from a few billion dollars all the way up to $20-odd billion, but whichever way you slice it, it looks like US GDP is going to be knocked back by the loss of government services and cuts to related business expenditure.

That is spurring speculation that the Fed will be forced to hold fire on tapering for the time being, and that is hurting the dollar and boosting the price of gold. By early afternoon in New York, the euro had gained just under 1% against the dollar, while the dollar slid 0.9% against the Japanese yen and 1.2% against the Swiss franc. Spot gold soared 3% to a two-week high.

With the US government now re-opened and a default narrowly averted, the focus of the market can return to economic fundamentals and quarterly reports from individual companies.

The Philly Fed survey was released today for October and shows manufacturing activity in the US Mid-Atlantic in fine fettle and apparently unfazed by the shutdown. The Philly Fed index was 19.8 this month, down a touch from September’s 22.3, but still very strong and higher than had been anticipated. The index for new orders strengthened to 27.5 from last month’s 21.2, which suggests momentum could be carried into next month.

Stocks dropped early on in New York, but by early afternoon had bounced, with the S&P up 0.3% at 1726.8 and closing in on its all-time high. The Dow has failed to break into positive territory today though, being dragged down by IBM after the company posted disappointing results. IBM is one of the highest-weighted companies in the DJIA and has fallen over 6.5% today.

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