The first U.S. government shutdown in 17 years is stokingspeculation that the longer it lasts, the more likely the FederalReserve will delay reducing its monetary stimulus program, boostingemerging-market currencies at the expense of the dollar.

At least $300 million a day in economic output will initially belost because lawmakers can't agree on a budget, according to IHSInc. A two-week shutdown starting Oct. 1 could cut growth by 0.3percentage point to a 2.3 percent rate, according to St.Louis-based Macroeconomic Advisers LLC.

The Fed's stimulus programs have weighed on the greenback, withthe Bloomberg Dollar Index falling 0.9 percent since Sept. 17. Thatwas the day before the central bank decided to keep printing cashto buy $85 billion of bonds a month because it has yet to see signsof sustained economic growth. The Bloomberg JPMorgan Asia DollarIndex is up 0.3 percent in that period.

“If the fiscal issue drags on, the Fed is likely to be lesswilling to reduce stimulus in the economy. The dollar will sufferif that is the case,” James Kwok, the London-based head of currencymanagement at Amundi, which oversees an equivalent of $1 trillion,said yesterday in a phone interview. Amundi has reduced bets thedollar will rise, according to Kwok.

Congressional leaders have scheduled no further negotiations onspending legislation, raising concerns among some lawmakers thatthe shutdown could bleed into the more consequential fight over howto raise the $16.7 trillion U.S. debt ceiling to avoid a first-everdefault after Oct. 17.

Financial markets are overconfident the fiscal stalemate inWashington will be resolved in time to avoid major economic damage,White House economic adviser Gene Sperling said.

“There is a false sense of complacency among some in the marketthat somehow things will be always solved at midnight,” Sperling,the director of President Barack Obama's National Economic Council,told Bloomberg News reporters and editors yesterday inWashington.

The Bloomberg U.S. Dollar Index, which tracks the performance ofthe greenback against a basket of 10 leading global currencies,fell as much as 0.4 percent yesterday on the first day of theshutdown, its biggest intraday drop in two weeks. The gauge hasdropped 4.2 percent from this year's high of 1,054.48 based onclosing prices to 1,010.38 as of 8:42 a.m. in New York.

Buying Opportunity

Currencies whose fortunes are linked to the commodities marketsuch as the Australian dollar appreciated yesterday, as did theColombian peso, Hungarian forint and Russian ruble. The BloombergJPMorgan Asia Dollar Index climbed 0.2 percent for its biggest gainsince Sept. 23.

“Markets anticipating that tapering might be delayed might usethat as an opportunity to buy higher-yielding assets at the expenseof the dollar,” Brian Daingerfield, a Stamford, Connecticut-basedcurrency strategist at Royal Bank of Scotland Group Plc's RBSSecurities unit, said yesterday in a phone interview. “A governmentshutdown increases the risk that fiscal problems will prevent anyjob recovery from being substantial and sustainable.”

The premium on three-month options granting the right to buy thedollar against Brazil's real, compared with those allowing forsales, fell to 2.87 percentage points, the lowest since Aug. 14,according to 25-delta risk reversal rates compiled byBloomberg.

Delayed Fed tapering has benefited inflows to emerging markets.BlackRock Inc., the world's largest money manager, received $4.45billion of deposits to its iShares MSCI Emerging Markets ETF inSeptember, the most since December, according to data compiled byBloomberg. Meanwhile, JPMorgan's global volatility gauge remainslower than its 2013 average.

“As they put tapering further and further out that reduces thevolatility in emerging markets,” Axel Merk, who oversees about $450million of currencies as head of Palo Alto, California-based MerkInvestments LLC, said yesterday in a phone interview. “These morevolatile and less liquid markets are going to do just fine.”

The JPMorgan Global FX Volatility Index was at 9.15, down from10.41 Sept. 3. Smaller expected price swings tend to boost theappeal of higher-yielding, riskier assets such as emerging-marketcurrencies.

Shutdown History

The U.S. government was partially closed yesterday with Congressdeadlocked over whether to tie any changes to the 2010 health-carebill to an extension of government funding. Even if the budgetfight is resolved, lawmakers would immediately move to the nextfiscal dispute over raising the debt ceiling.

There have been 17 government shutdowns since 1976, with five ofthem occurring within three months of each other.

General risk aversion that typically boosts the dollar willprobably be countered by the U.S. being the source of the latestfinancial instability, according to Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life InvestmentsLtd., which oversees about $289 billion.

“When markets are risk averse, the dollar and Treasuries havetended to be favored as the dollar has been the safe haven ofchoice,” he said yesterday in a phone interview. “Because there isthat mixture of risk aversion causing dollar assets to be slightlymore attractive and the U.S.-centric nature of this problem, Iwould expect the impact to be pretty minimal.”

The greenback may drop against the pound and the yen, while anylosses against the euro would be limited amid political turmoil inItaly and as investors wait for Germany's coalition talks to becompleted, Dickson said, adding that the U.S. currency may alsogain versus emerging-market peers.

The Fed will take the first step in reducing its monthly bondpurchases in December, according to 59 percent of 41 economists ina Sept. 18-19 survey conducted by Bloomberg.

Fed Chairman Ben S. Bernanke reset the central bank's timelinefor asset purchases on Sept. 18 and refrained from any tapering ofthe bond-buying program, surprising economists who, in a Sept. 6survey, said the central bank would reduce the size of the programto $75 billion.

There's a “relative balance-sheet story working against thedollar,” Robert Sinche, the global strategist at PierpontSecurities Holdings LLC in Stamford, Connecticut, said yesterday ina phone interview. “You look around and have to say, why would Itake incremental positions in the dollar?”

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