Dollar at 2021 highs even as U.S. government shutdown looms

© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration

By Iain Withers

LONDON (Reuters) - The dollar was flying high on Wednesday and hit a 2021 peak against rival currencies even though arguing in Washington over the U.S. debt ceiling threatened to plunge the government into a shutdown.

The greenback - the world's reserve currency seen as a safe haven bet at times of market stress - has strengthened in recent days as investors instead focus on fears of a global slowdown, a rise in energy prices and strongly higher U.S. Treasury yields.

Traders are also concerned the Federal Reserve will start to withdraw policy support just as global growth slows.

U.S. Senate Republicans on Tuesday blocked a bid by President Joe Biden's Democrats to head off a potentially crippling U.S. credit default, with federal funding due to expire on Thursday and borrowing authority on around Oct. 18.

"It's a sign perhaps of the confidence that people have in the U.S. that even as the U.S. government barrels toward a cliff like a car with a drunken driver who's being beaten up by his even more drunk passenger, the dollar can strengthen," said Marshall Gittler, head of investment research at BDSwiss, in a note.

"I presume this is because people have seen this movie before and they know how it ends."

The dollar index - which measures the U.S. currency against a basket of rivals - rose for the fourth consecutive trading day on Wednesday, up 0.2% to 93.891, its highest level since Nov. 2020.

The euro was among the currencies to lose ground, falling 0.2% to an 11-month low of $1.16565.

The yen showed little reaction to the election of Fumio Kishida as leader of Japan's ruling Liberal Democratic Party and on course to become the country's next prime minister.

The yen, which is sensitive to U.S. yields as higher rates can draw flows from Japan, touched an 18-month low of 111.685 per dollar, before rebounding to 111.210.

Sterling, which slumped on Tuesday amid worries over the economic impact of a shortage of gas and a scramble for fuel, extended losses to its lowest since January at $1.35.

Currency traders are watching closely for clues as to when governments and central banks worldwide will reverse massive emergency support launched to fight the pandemic last year.

European Central Bank (ECB) President Christine Lagarde, Fed Chair Jerome Powell, Bank of England Governor Andrew Bailey and Bank of Japan Governor Haruhiko Kuroda are panelists at an ECB forum in Sintra, Portugal, at 1545 GMT.

U.S. Treasury yields have surged in recent days as tapering looms before the end of the year and as inflation starts to look stickier than first thought. [US/N]