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US shutdown weighs on the dollar

US shutdown weighs on the dollar

AFRASIA KINGDOM 10 Oct 2013

In recent international currency market developments, the main feature has been a fall in the value of the US dollar against most of its trading counterparts owing to US government shutdown. us exchange rateA government shutdown is a situation in which a government ceases all or many of its functions due to a lack of an approved budget or other monetary support. Every year the US Congress has to approve laws known as appropriations which provide money for federal agencies. The new budget year begins on October 1 and Congress and the President must enact interim or full-year appropriations by this date if many governmental activities are to continue operating. If the appropriations are not enacted into law, the time interval when agency appropriations are not enacted is referred to as a funding gap. Under federal law if an agency   does not have an appropriation law in force, it cannot spend money so it has to close.

The Office of Management and Budget issued orders shortly before the midnight of 30 September that agencies should execute plans for an orderly shutdown due to the absence of appropriations because Congress had failed to act to keep the federal government financed. Funding gaps and government shutdowns have occurred in the past when Congress and the President did not enact regular appropriations bills by the beginning of the fiscal year. Since 1977 there have been 17 shutdowns according to the Congressional Research Service. The previous shutdown lasted for 21 days from 16 December 1995 through 5 January 1996.
Since the partial federal shutdown began on October 1, the greenback sank to its lowest against the euro in more than seven months and its weakest level versus the U.K. pound since January 2013. The pound hit a high of US$1,6238 on October 2 the highest level since January 3, 2013. The euro has risen to US$1,3574, the highest level since early February 2013. The dollar also weakened 1,3 percent to 96,94 yen as the Japanese currency is viewed as safe haven currency in this period of uncertainty. The rand also gained 1,1 percent to the dollar to R9,9773 driven by greenback weakness. Signs that the Fed would delay the scaling down of the US$85 billion a month asset purchases,a major source of portfolio flows into emerging marketscoupled with the current budget impasse in the world’s largest economy have supported high-yielding emerging market assets.
If the shutdown does indeed drag on indefinitely, the continued uncertainty will drive the Greenback to fresh lows. The dollar’s knee-jerk reaction was a sign that the currency is in for a bumpy ride in the near future. Besides reaching a budget deal to end the shutdown the Congress must agree to raise the US. Treasury’s borrowing limit by October 17 or the government will default on its debt. If the US defaults on its debt this would result in the country’s credit rating plummeting and the US dollar falling and thereby causing havoc in the international financial markets.

Zimbabwe might seem isolated from the day-to-day effects of the crisis in the United States but this isolation has been limited since 2009 when the country adopted the American dollar as part of the multi-currency system.The impact of weaker US dollar will be felt on the country’s balance of trade, which currently stands in a deficit position. A weaker dollar benefits Zimbabwe exports by making locally-produced goods cheaper in foreign currencies. Our tourism sector will also benefit as foreigners will it cheaper to visit the country. Since the dollar is falling, it may also be the right time for foreigner investors holding currencies other than the US dollar to make portfolio investments in the country.

On the other hand there are disadvantages from a weaker dollar. A weaker dollar implies that our imports will be more expensive and as such it will fuel inflation. Since the dollar is weakening it takes more dollars to purchase the same amount of foreign currency to buy goods and services and this will worsen the already ballooning balance of payment deficit. The country is a net importer as many commodities from fuel to foodstuffs are imported.

Such currency outflows lead to liquidity challenges that the country is currently facing and the persistent liquidity crunch has compromised the country’s ability to sustain the relatively robust economic growth achieved since dollarisation.