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US dollar gains traction, but faces strong headwinds

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US dollar gains traction, but faces strong headwinds

The US dollar strengthened against a basket of its major peers as Democrats and Republicans mobilize to end the longest partial government shutdown in 17 years. Senate leaders from both parties are scheduled to meet with President Barrack Obama to discuss a new proposal that could lift the budget impasse before the October 17 deadline.

The US dollar index advanced 0.15 percent to 80.40, but faces strong headwinds according to strategists. Firms such as Credit Suisse Group AG (NYSE:CS) and Westpac Banking Corporation (NYSE:WBK) have downgraded their median estimate for the US dollar by an average of 1.2 percent. The October forecast is the third consecutive month the US dollar outlook has been downgraded against the Canadian dollar, pound, euro, yen and Swiss franc. The dollar’s median estimate was downgraded 1.7 percent last month, the biggest drop of the year.

“The dollar should increasingly trade across the board on the back foot,” said Richard Franulovich of Westpac. Standard Life anticipates the US dollar will face “lasting damage,” as ongoing government dysfunction continues to erode confidence in the safe haven currency.

The Bloomberg US dollar index, which monitor’s the greenback’s performance against ten of its major peers, is down 4.3 percent following a three-year high in July. The index fell amid growing speculation the Federal Reserve won’t scale back the pace of its monthly asset purchases this year.

Monday marked another dry day for US economic data, as the partial government shutdown continues to suspend activity of key departments. The absence of data has made it more difficult for market participants to determine the pace of US recovery. This in-turn has made it more difficult for the Federal Reserve to plan its next course of action regarding quantitative easing. The central bank is scheduled to meet October 29 to discuss the fate of QE3. Several bodies, including the International Monetary Fund, expect the budget impasse to be lifted before the Fed’s next policy meeting.

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