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Dollar Sinks, Treasurys Rise

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Updated Oct. 17, 2013 9:36 a.m. ET

The dollar sank, U.S. Treasury prices rallied and gold shot higher after lawmakers reached a last-minute deal to avoid a U.S. debt default, as investors anticipated that lingering uncertainty in Washington would push back the Federal Reserve’s plans to wind down stimulus efforts.

The 11th-hour deal struck late Wednesday in Congress will reopen the government through Jan. 15 and extend the debt ceiling through Feb. 7, allaying fears of an imminent U.S. default. But investor relief turned to concern about the 16-day fight’s toll on the world’s largest economy.

Many analysts have pushed back their expectations for a reduction in Fed bond buying—once viewed as certain to begin in September—until the first quarter of 2014. In addition, investors remain wary that U.S. lawmakers will go through a similar political standoff in early 2014, further muddying the growth outlook.

Confidence in continued Fed stimulus for the near term drove down the dollar and pushed up Treasury prices. The greenback hit an eight-month low against the euro, recently trading 0.8% lower at $ 1.3646. Against the Japanese yen, the dollar slid 0.9% to buy ¥97.91.

The benchmark 10-year Treasury note was 12/32 higher, yielding 2.625%, according to Tradeweb. Very short-term Treasury debt, or T-bills, rallied as the risk of a near-term default was averted. The benchmark one-month T-bill yielded 0.02%, close to levels seen before the fiscal crisis heated up. The T-bill due Oct. 24 yielded 0.03%, from a multiyear peak of 0.722% Wednesday.

Gold for December delivery, the most active contract, was recently up $ 34.80, or 2.7%, at $ 1,317.20 a troy ounce on the Comex division of the New York Mercantile Exchange.

“It’s very hard to see how the Fed can taper in the face of a government that might shut down every three months,” said David Scott, a portfolio manager at Stone Harbor Investment Partners, which manages $ 63.1 billion of assets.

The Federal Open Market Committee holds its next policy meeting later this month on Oct. 29-30.

In early U.S. trade, the Dow Jones Industrial Average dropped 0.6% to 15275. On Wednesday, the Dow rallied 1.4% after Senate leaders reached a deal to raise the debt ceiling and reopen the government. The House voted Thursday evening to pass the bill, which will reopen the government through Jan. 15 and extend the debt ceiling through Feb. 7.

The S&P 500 index shed 0.2% to 1718, and the Nasdaq Composite Index lost 0.2% to 3832.

The Stoxx Europe 600 was down 0.3%, Germany’s DAX 30 index fell 0.8% and London’s FTSE 100 index dropped 0.3%.

—Tomi Kilgore, Min Zeng, Tatyana Shumsky and Ira Iosebashvili contributed to this article.

Dollar Sinks, Treasurys Rise

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