US dollar weakens on stimulus speculation

The dollar has fallen against all its major peers today, as the fallout from the debt-ceiling wrangles and the US government shutdown undermines the case for the Fed to taper its stimulus.

Richard Fisher, the President of the Federal Reserve Bank of Dallas, said today that he thinks the Fed should maintain its $85 billion of asset purchases at the next FOMC meeting.

Although Mr Fisher is a non-voting member of the FOMC this year, he has until recently been a strong proponent of tapering, and this about-face from such a hawkish member of the Fed therefore gives a strong indication of the way the wind is blowing.

Because of what he described as ‘fiscal shenanigans’, there is too much uncertainty to ‘change course’ on monetary policy, Mr Fisher said, and that his view is that the FOMC should ‘stay the course’ when it comes to the next policy meeting.

Quite apart from the negative impact of the shutdown on the US economy, there simply may not be enough data available for the committee to be able to justify reducing stimulus; past action suggests they will err on the side of caution and maintain their bond purchases in the case of uncertainty over the economy’s progress.

Given that GDP may be slashed by tens of billions by the shutdown and there may also be a knock to consumer confidence from the whole debacle, tapering at any of the next few meetings is beginning to look less likely and expectations are now shaping up for tapering in early 2014 (when Richard Fisher will be a voting member of the FOMC), which is dollar negative.

By mid-afternoon in New York, EUR/USD had risen 1% to 1.3670, its highest level seen all year. The dollar’s weakness was broad, with the dollar index plummeting 1%.

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