The dollar took a hit in early European trading Tuesday as investors woke up to the first U.S. government shutdown in 17 years, but there was no panic in wider financial markets as European stocks posted modest gains and futures pointed to a positive open in U.S. equity markets.
The U.S. currency slid amid concerns that the partial shutdown of the federal government would be a short-term drag on the country's economy.
The euro climbed to $1.3589, its strongest level since February, before edging back down, while sterling hit new highs for the year against the greenback at $1.6259. The dollar slid against the yen, trading at ¥97.71 midway through the European session.
That burst of dollar weakness also hinted that markets are taking Congress's failure to reach a budget deal in their stride, given that the currency generally benefits as a safe harbor in times of heightened tension.
"Markets haven't entered panic mode," said Geoffrey Yu, a currencies strategist at UBS.
In Asian trading hours, the dollar slid only slightly against the yen, but volumes in the currency markets surged once European trading started.
"Volume has picked up significantly in the euro against the dollar since Europe walked in," said Citigroup C -0.78% in a note to clients. "Buying accounts for 54% of our flow," the bank said, adding that hedge funds and banks were particularly active buyers.
Adding to the drag on the dollar were manufacturing data for the euro zone and the U.K., which showed the sectors continued to grow in September, albeit at a slower pace than the previous month.
The dollar decline tripped up analysts at UniCredit, UCG.MI +1.78% who said their trade to sell euros against the buck, opened last week, hit its limit and was canceled for a loss of 0.66%.
Some believe the dollar weakness could prove fleeting.
"Historical evidence shows that the impact on the dollar [of a government shutdown] is mixed to slightly negative and so far it has not been very strong," said Roger Hallam, chief investment officer for currency management at JP Morgan Asset Management, which manages $1.5 trillion in assets globally.
"We expect the dollar to rebound against the euro, assuming that there is an orderly resolution to the current shutdown."
Gold initially pushed higher after European trading started, reaching $1,331 per troy ounce, up by around $2, but it later fell back. U.S. Treasury bonds, which dipped in Asian trading hours, remained pinned lower but didn't extend losses, with yields hovering at around 2.655% on debt maturing in 10 years.
Still, European equity markets echoed Asia in largely shrugging off the shutdown, while U.S. stock futures were up.
About two hours before the start of trading, futures for the Dow industrials rose 54 points, or 0.4%, to 15100—a marked difference to sharp losses seen in Monday's premarket session. Futures for the Standard & Poor's 500 index gained 7.6 points, or 0.5%, to 1681.90. Futures for the Nasdaq-100 index rose 13.75 points, or 0.4%, to 3222.75. Changes in futures don't always accurately predict early market moves after the opening bell.
"There has been such a buildup to a possible government shutdown that now that it has arrived it has been met by a degree of indifference. Nearly all Asian equity markets are higher today," noted Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi UFJ. The Stoxx 600 Index, which includes a range of European stocks, was 0.3% higher.
The confirmation of the shutdown had earlier seen Japan's Nikkei Stock Average give up gains of more than 1%, before it was jolted back to a gain of roughly 0.8% when Prime Minister Shinzo Abe announced a decision to raise Japan's sales tax next year.
A greater concern to investors is the impending showdown over the U.S. borrowing limit, with the Treasury expected to run out of money by mid-October if Congress doesn't agree to let the government borrow more.
"The more important question is whether the shutdown is a good representation of what will happen with the debt ceiling debate later in the month. Failure to resolve raising the debt ceiling would be an issue of different magnitude," said Mr. Hallam of JP Morgan Asset Management.
