Picture: 123RF/LEONID IKAN
Picture: 123RF/LEONID IKAN

London — The dollar wallowed near three-year lows on Friday as heightened fears of a US government shutdown unnerved investors, while US treasury yields continued an upwards march to hit their highest levels since September 2014.

Legislation to stave off an imminent federal government shutdown encountered obstacles in the US Senate late on Thursday, despite the passage of a month-long funding bill by the House of Representatives hours earlier.

Without the injection of new money, no matter how temporary, scores of federal agencies will be forced to shut starting at midnight on Friday, when existing funds expire.

The dollar index, which measures the greenback’s value against other major currencies, was down 0.3% at 90.230 and close to three-year lows hit this week. It has already lost 2% in the early days of 2018.

"The fear of the US government shutdown has made investors nervous," said Naeem Aslam, chief market analyst at ThinkMarkets UK. "There is a strong possibility that the US government shutdown may become a reality."

Market players said worries of a shutdown may have also weighed on sentiment in bond markets, which remain under pressure from expectations that strong economic data globally will encourage the US Federal Reserve to press ahead with monetary tightening.

US 10-year treasury yields hit their highest level in more than three years at 2.642% on Friday, and were set for their biggest weekly rise in a month.

"It’s a continuation of the trend and expectations for a normalisation of monetary policy," said Chris Scicluna, head of economic research at Daiwa Capital Markets, referring to rising US bond yields.

Firm ground

In Europe, equity markets opened firmer with the exception of London’s blue-chip FTSE 100. Germany’s DAX 30 was 0.5% higher on the day and France’s CAC 40 was up 0.1%. The MSCI world equity index, which tracks shares in 47 countries, touched fresh record highs, buoyed by gains in Asia.

Optimism over the global economic growth outlook and improved corporate earnings have helped share markets rally at the start of 2018. Supporting economic confidence was data on Thursday that showed China’s growth in 2017 accelerated for the first time in seven years.

China stocks ended at fresh two-year highs on Friday, with the Shanghai index posting its fifth straight week of gains. Japan’s Nikkei closed up 0.2%.

Euro shines

The euro rose 0.4% to $1.2280 after hitting a three-year peak above $1.2300 earlier this week on expectations that the European Central Bank (ECB) would take steps towards winding back on stimulus measures to normalise monetary policy.

The euro’s rally was tempered later as some ECB officials voiced worries about the currency’s strength.

China’s yuan, meanwhile, breached the psychologically important 6.4 to the dollar level for the first time in more than two years, the day after Beijing said annual growth was 6.8% in October to December, slightly above forecasts.

Oil prices, meanwhile, fell more than 1% as a bounce-back in US production outweighed ongoing declines in crude inventories.

Brent crude futures were at $68.63 a barrel, down 1.03% on the day. On Monday, they hit their highest since December 2014 at $70.37. US West Texas Intermediate (WTI) crude futures were also 1% lower, trading at $63.28 a barrel.

Gold prices rose, supported by a weaker dollar amid worries about a possible US government shutdown, but the metal was still on track for its first weekly drop in six weeks.

Reuters

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