The dollar was pinned near a three-year low on Monday as a US government shutdown encouraged investors to add to bearish bets against the greenback, while the euro consolidated recent gains.
As indicators such as the Vix and the euro/dollar -- which traditionally flared up in previous US government shutdown episodes -- remained well within recent ranges, currency markets remained focused on two major central bank meetings this week, namely the Bank of Japan and the European Central Bank.
While Japan is unlikely to signal any policy normalisation at the conclusion of a policy meeting on Tuesday, the surprise package for markets may be from the ECB which may stick to its dovish policy stance and unlikely to offer any hint of a change in forward guidance.
That may undermine the euro's rally which has gained more than 2 per cent in the opening days of 2018 after double-digit gains last year on growing expectations that the ECB may be forced to unwind its policy stimulus quicker than previously estimated thanks to a broadening recovery.
“Unless the US government shutdown ends very quickly which may boost the dollar, markets are focusing on the two other cross currents this week, namely the BoJ and the ECB with the latter likely to surprise euro bulls,” said Alvin Tan, a currency strategist at Societe Generale in London.
On Monday, the euro edged 0.1 per cent higher to $1.22430 and not far away from a three-year peak of $1.2323 that it scaled on Wednesday.
Political developments
Recent data and political developments, especially in Germany, has also proved to be supportive of the euro, with business sentiment remaining optimistic and capital spending picking up.
Meanwhile, latest positioning data showed dollar bears extended bets against the greenback last week as political wrangling dented investor confidence.
US government shutdown
The US government shutdown took effect at midnight on Friday after Democrats and Republicans, locked in a bitter dispute over immigration and border security, failed to agree on a last-minute deal to fund government operations.
In order to break the impasse, Republican and Democratic leaders of the US Senate held talks on Sunday. Senate Majority Leader Mitch McConnell had said late on Sunday that an overnight vote on a measure to fund government operations through Feb. 8 was cancelled and would instead be held at 12 p.m. (1700 GMT) on Monday.
“The market is accustomed with what is taking place in US politics. It is not reading too far into the shutdown, which is more like a political show,” said Koji Fukaya, president of FPG Securities in Tokyo.
The dollar's index against a basket of six other major currencies initially dipped to hit 90.155 but was last up 0.1 per cent at 90.665, managing to hold above the three-year trough of 90.113 set on Thursday. The pound dipped 0.3 per cent to $1.3862, pulling away from a 1-1/2-year top of $1.3942 reached on Wednesday following Friday's disappointing UK retail sales data.