U.S. dollar up as invertors resume quest for safety
The British pound was under pressure on Thursday after Standard & Poor's cut its U.K. credit-rating outlook, sending the recently high-flying currency in the opposite direction.
The British pound fell as low as $1.5515, before recently trading at $1.5699, though still down from $1.5736 on Wednesday, following the move by Standard & Poor's to lower the credit-rating outlook on the U.K. See S&P story.
The rating agency shook markets on the decision to put Britain's AAA credit rating under threat. The S&P decision came as the British pound this week has rallied to the highest since November as equity markets have rallied from March lows and the financial system has been perceived to be on safer footing. See S&P story.
The U.K. economy is one of the most sensitive of leading industrialized nations to the financial services industry.
"I think the fact [the S&P move] came alongside a very, very sharp rally in the pound makes the move more exaggerated," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London.
"My own view on sterling is that it will be a painful currency to hold," he said, saying the pound is particularly susceptible to declines against currencies such as the euro, the Norwegian krone, or the Australian dollar, where the issuing countries don't have the same levels of fiscal imbalances.
The yield on 10-year gilts rose to as high as 3.72%, the highest in almost three weeks.
However, news that a 5 billion pound sale of U.K. government debt was successful helped the U.K. currency move off lows.
U.S. outlook
The U.S. dollar gained some support after the nation's Labor Department said new claims for jobless benefits in the U.S. declined, thought the number of people remaining unemployed hit a record high. See more on initial claims.
$DXY 81.19, +0.21, +0.26%
9085807570
09JSA
The data kept U.S. equities down, lower, giving some encouragement for investors to reduce risk and prefer the safe-haven of the dollar.
The dollar index (DXY 81.19, +0.21, +0.26%) , which measures the greenback against a variety of currencies, rose to 81.230 from a seven-month low of 80.002 in late North American trading Wednesday.
The dollar fell to 94.58 yen from 94.74 yen Wednesday and the euro slid to $1.3764 from $1.3829.
Overseas equities were pressured after the U.S. Federal Reserve late Wednesday lowered its outlook for domestic employment and said the world's largest economy would shrink more than previously forecast.
"The green shoots of growth that had helped support the foreign currencies against the U.S. dollar and the equity markets were flattened yesterday after the Fed staff revised down the 2009 and 2010 growth forecasts, suggesting the green shoots of recovery would take more time to take hold" said strategist at Brown Brothers Harriman.
The dollar stayed up even after the Philadelphia Fed's report said manufacturing in that region improved to 22.6 in May, from -24.4 last month. Readings below zero indicate contraction in the industry.
Also, the national index of leading indicators rose to 0.1% in April, the first increase in seven months, from -0.3% in the prior month. The move to a positive number indicates the recession will be less intense in the near term, according to the Conference Board.
