Dollar, yen tally fresh gains after S&P cuts outlook on Spain
The dollar rose against most major rivals Monday, as the euro was pressured by news that Standard & Poor's might cut its ratings on Spain, as well as by growing expectations that the European Central Bank will cut interest rates later this week.
S&P said it could cut Spain's AAA bond rating, as the ratings agency frets about weak growth prospects at a time when the nation's finances are imperiled. See full story on S&P's Spain rating.
On Friday, S&P did the same for its credit ratings on Greece. It also cut the outlook on Ireland's rating to negative from stable.
"At the end of last week, the rating agency S&P put Greece's long-term sovereign rating on credit watch for a possible downgrade. Today it did the same for Spain," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
"The market appeared to take advantage of the headline announcement to do what they wanted to do and that was take the euro down," he said.
The euro was also dragged down by increasing perceptions that the European Central Bank will cut interest rates at its meeting later this week, amid signs of significant deterioration in the 16-nation region's manufacturing sector.
The dollar index , which measures the greenback against a basket of six major counterparts, was at 83.105, up from 82.483, in late North American trading Friday.
The euro changed hands at $1.3373, down from $1.3452 late Friday.
The euro also slipped vs. the Japanese currency, trading at 119.09, down 2.1%.
The yen gained on the dollar, with the U.S. unit buying 89.06 yen, down from 90.42 yen at the end of last week.
On Wall Street, U.S. stocks ended solidly lower, to the benefit of the Japanese currency. See Market Snapshot.
Whenever risk aversion rises as market conditions worsen, investors tend to reduce positions in higher-yielding investments funded in lower-yielding currencies, such as the yen.
ECB on deck
In addition to the S&P downgrades, a recent run of abysmal euro-zone data weighed on sentiment, and boosted odds for an ECB interest-rate cut.
The ECB's key lending rate now stands at 2.5%. Most economists expect the central bank to order up a reduction of half a percentage point, or 50 basis points, on Thursday.
Recent data raise questions about the ability of euro-zone officials to deal with a rapidly deteriorating economic outlook. Read about last week's euro-zone manufacturing data.
"While the ECB could cut by 50 basis points this week [our expectation], we would need to see significant flexibility on the part of the ECB to help stabilize the economy and sentiment on the euro," wrote strategists at BNP Paribas.
The U.S. Federal Reserve has reduced benchmark U.S. interest rates to a range of 0.25% to zero percent, leaving the central bank in the position of resorting to other measures in efforts to revive the largest world economy.
