Portugal’s credit rating cut; bonds rejected by clearinghouse
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar extended gains versus major currencies Friday after a Federal Reserve official said the central bank should aggressively tighten monetary policy within a year.
The euro was under pressure earlier after another downgrade to Portugal’s credit rating triggered a move that made the country’s bonds less liquid, on top of the lack of a comprehensive agreement in Brussels on how to deal with the region’s long-running debt crisis.
The dollar index (DXY 76.15, +0.50, +0.65%) , which measures the U.S. unit against a basket of major rivals, rose to 76.242, up from 75.665 in North American trade late Thursday.
The euro (EURUSD 1.4081, -0.0084, -0.5930%) fell to $1.4068, off from $1.4181 Thursday.
For the week, the dollar index has gained 0.7% and the euro has declined 0.8%.
Charles Plosser, the president of the Philadelphia Federal Reserve Bank, said the U.S. central bank should hike interest rates from current range near zero to 2.5% within a year, starting in the “not-too-distant future.” See more on Plosser’s plan.
He also proposed the Fed quickly sell some of its recently purchased bonds as it increases the benchmark interest rate. Both raising rates and reversing some of the purchases that many analysts consider akin to printing money would reduce some of the serious pressure keeping the dollar down.
“The dollar rallied after hawkish comments from the Philly Fed’s Plosser,” said analysts at Actions Economics.
The euro came under pressure earlier after Standard & Poor’s lowered Portugal’s credit rating to BBB from A-minus, following a downgrade by Fitch Ratings. Read about S&P downgrade of Portugal.
The S&P downgrade led to clearing house LCH.Clearnet saying Friday that Portuguese government bonds will no longer be eligible for delivery in any of its RepoClear baskets, effective Monday.
That reduces liquidity and makes the bonds more difficult for traders to use as collateral in money markets.
“For most of the week, the market has treated Portugal as an isolated problem that will not spread to other parts of Europe, but this sentiment is losing popularity very quickly,” said Kathy Lien, director of currency research for GFT.
Earlier this week, Portugal’s parliament defeated additional austerity measures proposed by the nation’s minority government, prompting the resignation of Jose Socrates as prime minister and fueling speculation that Lisbon would soon be forced to seek an international bailout.
The political fallout came as European Union leaders met in Brussels but delayed finalizing details of a plan to boost the lending capacity of the euro-zone bailout fund, known as the European Financial Stability Facility, or EFSF.
The main change so far was an agreement to slow the funding of the European Stability Mechanism, the bailout facility that will replace the EFSF in 2013. Read more about EU summit.
