Demand for the US dollar dwindled yesterday as it remains pretty clear that the ongoing fiscal impasse is overhanging investors thoughts as to the likelihood of a government default.

The Chinese vice finance minister and South Africa’s finance minister both raised their concern and urged both the Republicans and Obama’s administration to come to an agreement over government spending in order for the US to prevent hitting its debt limit and as a result defaulting.

Demand for the US dollar dwindled yesterday as it remains pretty clear that the ongoing fiscal impasse is overhanging investors thoughts as to the likelihood of a government default.

The Chinese vice finance minister and South Africa’s finance minister both raised their concern and urged both the Republicans and Obama’s administration to come to an agreement over government spending in order for the US to prevent hitting its debt limit and as a result defaulting.

Goldman Sachs also weighed in and predicted that should the debt ceiling be breached then there could be severe spending cuts as well as a 4.2% hit to GDP. This in turn would give the Federal Reserve less of an argument to even think about tapering quantitative easing.

The pound was boosted for the first time in three days as an industry report revealed that optimism in the UK’s financial industry improved in the third quarter, providing a strong argument about the strength of the UK economy.

Data from the euro zone revealed that single bloc grew by 0.3% in the second quarter, unchanged from preliminary estimates. The Sentix index revealed that euro zone investor confidence dropped to 6.1 in October from 6.5 in September as concerns over the US political impasse weighed in on investor sentiment.

Whilst concerns continue to linger over the US, we would expect markets to continue to favour safe havens such as the Swiss franc and the Japanese yen over the US dollar. Although it is worth noting that 10 year US Treasury bonds actually rose in value yesterday suggesting stronger demand for America’s debt. This market would be worth keeping an eye as a strong demand for US government debt, which is somewhat surprising given the risk of default, could also mean a strong demand for the US dollar.

Key Announcements:

11.00am – EUR – German Factory Orders (Aug): Expected to improve 1.2%.

13.15pm – CAD – Housing Starts (Sep): Expected to improve to 185,000.