The chaos in Washington casts its shadow on the economy

Washington’s particular style of functioning appears to be adding to investor concerns and markets across the globe. Partial shutdown of the government, trade wars, open confrontations have added barrels of fuel to the fire.

On Tuesday, the greenback fell to its 4-month low against the yen as investors rushed to slash their exposure to riskier assets even as Washington struggled with managing a partial shutdown of the government and an open confrontation between the White House and the central bank.

In early trade, the dollar fell by 0.27% to 110.12 yen on Tuesday – its lowest level since late August 2018, extending its seven-day losing streak. The yen also hit its 16-month high against the British pound and was seen trading at 139.90 yen.

U.S. stocks plunged across the board by more than 2%; oil prices also tanked as trade and other developments in Washington added to investor concerns about a slowdown in the global economy in 2019.

“People are saying this is a black Christmas,” said a veteran currency trader at a major Japanese bank.

Wall Street’s volatility index, which measures implied volatility of stocks and is often seen as a gauge to measure investors’ fear, jumped to 36.10, its highest levels since February 6, 2018, when it briefly touched a high of 50.30.

On Monday, Chairman Jerome Powell, the chairman of the the Federal Reserve faced a broadside from the White House with U.S. President Donald Trump blasting the Federal Reserve saying it was the “only problem” for the U.S. economy; his comments come after reports that Trump had discussed his firing.

“If talk of firing Powell becomes more realistic, that would undermine the Fed’s independence as a central bank and ultimately confidence in the dollar,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

As a sell-off in equities escalated, U.S. Treasury Secretary Steven Mnuchin hosted a call with the president’s Working Group on Financial Markets, a body known colloquially as the “Plunge Protection team”.

According to some, holding the meeting, which is typically convened only during times of heavy market volatility, backfired since it further lent weight to investor concerns and did little to soothe the market.

These incidents come in the backdrop of Sino-U.S. trade tensions and midst a waning of Trump’s tax cuts to the U.S. economy.

Safe-haven assets, such as the Swiss franc and gold, were supported, although they have not been traded on Tuesday.

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