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Dollar Weakens Before U.S. Debt-Limit Vote; Aussie Climbs to Record High

The dollar slumped to record lows against the Swiss franc and the Australian and New Zealand dollars as President Barack Obama and lawmakers argued over plans to raise the U.S. debt limit and prevent a default.
The yen reached the strongest level in four months versus the dollar. The euro fell against the yen and retreated from a three-week high versus the dollar as German Finance Minister Wolfgang Schaeuble said his country opposed a “blank check” for the euro-area rescue fund to purchase bonds on the secondary market. Australia’s dollar climbed after data showed inflation accelerated. U.S. data today is forecast to show demand for durable goods grew at a slower pace.

“The foreign-exchange market is acting like this is the only thing going on in the world” for the dollar, said Kathleen Brooks, research director in London at Forex.com, a unit of the online currency trading company Gain Capital Holdings Inc., referring to the U.S. debt impasse. Currencies including the U.K. pound “are being lifted on this wave of dollar-selling,” she said.

The dollar slid as low as 77.58 yen, the weakest level since March 17, before trading 0.3 percent lower at 77.65 yen at 9:59 a.m. in London. The dollar was 0.1 percent stronger at $1.4484 per euro. It declined earlier to $1.4536, the weakest level since July 5. The pound reached $1.6421, the highest since June 14, before appreciating 0.1 percent to $1.6410.

The U.S. currency sank to a record 87.65 cents per New Zealand dollar before trading at 87.58 cents, down 0.6 percent. It dropped 0.2 percent to 80 Swiss centimes after touching an all-time low of 79.96 centimes.

Veto Threat

The Obama administration threatened a presidential veto of House Speaker John Boehner’s two-step plan to raise the $14.3 trillion debt ceiling and cut $3 trillion in expenditure. A vote on the measure had been scheduled for today and was postponed until tomorrow, still ahead of an Aug. 2 deadline when Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default.

A cut of the U.S.’s top AAA credit rating would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said yesterday on a conference call hosted by the Securities Industry and Financial Markets Association.
Standard & Poor’s reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and said it may cut the nation as soon as August.

Dollar ‘Catalysts’

“Looking for catalysts to sell the dollar is no problem at all,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “If politicians fail to reach an agreement, dollar selling will accelerate. Even if they do agree, spending cuts will slow the U.S. economy.”

Demand for durable goods in the U.S. rose 0.3 percent in June after a 2.1 percent gain the previous month, according to economists’ estimates compiled by Bloomberg before the Commerce Department report today.
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was little changed at to 73.533 today, after dropping to 73,421, the lowest level since May 5.

Australia’s currency gained 8.5 percent in the last 12 months, the second-best performer after the franc’s 18 percent surge, Bloomberg Correlation-Weighted Currency Indexes showed.
The South Pacific nation’s consumer price index rose 0.9 percent in the second quarter from the previous three months, the Bureau of Statistics said today. The median estimate of economists was for a 0.7 percent increase.

Aussie Rates

Traders are betting the Reserve Bank of Australia will cut its key rate by about 23 basis points in the next 12 months, compared with a decrease of 55 basis points expected as of July 18, according to a Credit Suisse Group AG index based on swaps.

“The money market will take out most, but probably not all, of the rate cuts that it’s got priced in for the next 12 months,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s biggest lender.

The so-called Aussie reached $1.1081, the most since the currency was freely floated in 1983, before trading at $1.1066 from $1.0956 yesterday.

Europe’s common currency declined versus 14 of its 16 most- actively traded peers, declining the most against the Australian and New Zealand dollars, amid speculation Europe’s latest aid package may not be sufficient to prevent contagion.

Schaeuble Comments

Schaeuble, in a letter to lawmakers from German Chancellor Angela Merkel’s government, also said European governments must prevent a breakup of the euro region as well as an “uncontrolled” exit of one of its members.

Bank of Japan board member Hidetoshi Kamezaki today said he’s watching the yen’s gains with great caution as they could damage the economy. The BOJ will take needed policy action proactively, he said.
Group of Seven nations jointly sold the yen on March 18 after it reached a postwar record of 76.25 to the dollar the previous day, saying in a statement they wanted to reduce “excess volatility and disorderly movements.” Japan’s Finance Ministry sold 692.5 billion yen ($8.9 billion) that month in its first intervention since a unilateral action in September.

“I guess Japan has already got a nod from the U.S. on an independent intervention,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. a currency margin company. “It won’t come about straight away, but preparations must have been done.”(Bloomberg)

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The dollar fell to a record low versus the Swiss franc and a four-month trough against the yen on Monday as failure to reach a deal to raise the U.S. debt ceiling unsettled financial markets and fueled demand for perceived safe-haven currencies.

Most investors expect a debt deal will be done before the August 2 deadline to avert default, but the lack of progress in talks over how to cut the U.S. budget deficit and the possibility that ratings agencies may downgrade the nation's debt weighed on risk sentiment.

The U.S. Treasury says it will run out of money to pay the country's bills after August 2, though some analysts say the Treasury may be able to scrape some money together to get by for a week or two -- a scenario that some market players are starting to think cannot be ruled out.

The dollar shed nearly 2 percent on the day against the Swiss franc to hit an all-time low of 0.8029 franc on trading platform EBS. The franc also rose sharply against the euro.

"The U.S. will have to come up with credible long-term plan in order to avert a downgrade," said Manuel Oliveri, currency strategist at UBS in Zurich.

"The increasing risk of a downgrade means declining confidence in U.S. assets and the risk of capital outflows, which is a negative for the dollar against the Swiss franc and the yen," he added.

The dollar slipped to a four-month low of 78.05 yen in European trade, with traders reporting selling from Asian sovereign accounts.

Many traders think the dollar could test a record low of 76.25 yen if the U.S. debt crisis drags on.
The greenback was close to a six-week low hit against a basket of currencies last week of 73.889. .DXY
"Below 74 in the dollar index could see it potentially down toward the record lows (around 70.70) hit in 2008," said Kathleen Brooks, head of research strategy at FOREX.com.

"If U.S. GDP data on Friday shows weak growth added to an unsustainable debt burden, that has to be toxic for the dollar," she added.

SWISS FRANC SHINES

The euro initially slipped against the dollar after Moody's downgraded Greece by three notches to Ca from Caa1, though the impact was limited because the move was not a surprise and traders were focused on the U.S. debt saga.

The euro was last up 0.3 percent against the struggling dollar at $1.4400, but the euro zone's lingering debt risks kept traders wary over the single currency.

The sweeping bailout and policy package agreed by euro zone leaders last week has helped stem market panic in the short run. But analysts say the measures may not be enough to bring the crisis to a swift resolution.

Such uncertainty fueled further demand for the low-yielding Swiss franc, which many investors see as the cleanest way of playing euro zone and U.S. weakness. The euro was down 1.7 percent at 1.1568 francs, within sight of a recent record low of 1.1365.

"With lingering uncertainty over the sustainability of the euro zone bailout package and concerns over the U.S. debt ceiling, we would expect the franc to continue to gain this week," said Oliveri at UBS. (Reuters)