Financial markets are taking the partial shutdown of the US government in their stride in hope of a swift political breakthrough.
Australian shares ended Wednesday's trading session 0.2 per cent higher, while the Australian dollar was modestly lower at around 93.5 US cents.
US Congress failed to reach a compromise on its budget ahead of the US financial year-end on September 30, prompting the shut down that sent about 800,000 public servants home without pay and left only essential government services open.
Bank of America Merrill Lynch economist Saul Eslake said, if the shutdown lasts a few days, there should be only a minor impact on the world's largest economy.
Longer than that and the consequences become more significant. If it extends to a couple of weeks it could reduce US growth in the December quarter by 0.5 per cent.
Any longer could wipe out all growth in the quarter.
The bigger concern will be if the US Congress doesn't agree to lift its debt ceiling by the middle of this month, risking default for the first time.
"If Congress isn't able to resolve this impasse before the US hits the debt ceiling, one of the possible consequences could be a fall in the US dollar and further unwelcome (upward) pressure on the Australian dollar," Mr Eslake told ABC radio.
"The Reserve Bank clearly wants a lower exchange rate and is quite frustrated about its inability to fulfil that."
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2.5 per cent at its monthly board meeting on Tuesday.
But RBA governor Glenn Stevens said a lower currency would assist in rebalancing growth in the economy.
Economists believe that after slashing the cash rate to an all-time low, the central bank will be reluctant to cut much further.
National Australia Bank has pushed back its expectation of a further rate reduction to February 2014, rather than next month.
But NAB still expects economic growth to slow to around two per cent by the end of the year, and well below trend at around three per cent.
This will put pressure on employment and with the new federal government shedding public servants the jobless rate could hit 6.75 per cent in the second half of 2014.
The rate was 5.8 per cent in August.
"With the big picture still unmoved, we continue to see a cut coming but right now there is no rush," NAB group chief economist Alan Oster said in a note to clients.
The improvement seen in confidence, retail spending, manufacturing and house prices since the August interest rate cut failed to extend into August building approvals, which fell by a larger than expected 4.7 per cent.
Housing Industry Association chief economist Harley Dale said, while approvals are still trending higher, the recovery has been too slow and too narrow geographically.
"This has been the case for some time and the situation simply isn't changing," Dr Dale said in a statement.
Share
