By William L. Watts and Virginia Harrison, MarketWatch
FRANKFURT (MarketWatch) — A rally by the U.S. dollar versus the safe-haven Swiss franc and Japanese yen faded Monday, while commodity currencies continued to benefit from a global relief rally after the White House and top U.S. lawmakers agreed on a plan to raise the government’s debt limit and avoid a default.
The agreement, announced Sunday night by President Obama, would raise the U.S. debt limit and cut federal spending by around $2.4 trillion. It must be approved by the House and Senate, where votes are expected to take place later Monday.
The news was credited with lifting stock markets in Asia and Europe and boosting U.S. stock-index futures. Read Indications: U.S. stock futures rally on debt deal.
The dollar initially rallied versus the franc USDCHF -1.07% , rising as high as 79.53 centimes, but changed hands in recent action at 78.65 centimes, down from 78.86 centimes in North American trade late Friday. There are 100 centimes in a Swiss franc.
Against the Japanese yen, the dollar rose USDJPY -0.32% back above ¥78.00 after Obama’s remarks on the debt-ceiling deal. It later retreated to ¥76.96, down from ¥77.01 in North American trade late Friday.
The dollar index DXY -0.05% , which tracks the U.S. unit against a basket of six major currencies, fell to 73.643, down from 73.846 late Friday.
Growing fears of default were credited with driving the dollar to a record low around 78.50 centimes versus the Swiss franc last week and sending the U.S. unit to a four-month low versus the Japanese yen. The franc and yen are seen as safe-haven currencies.
“The [dollar’s] knee-jerk reaction against the franc and yen is totally understandable given the gains [versus the dollar] of the past two weeks, together with the fact that investors’ main concern in recent weeks has been safety and capital preservation,” said Simon Smith, chief economist at FxPro in London, in emailed comments.
But the upcoming House vote on the package and concerns that the U.S. government could still lose its AAA credit rating may cap the dollar’s upside potential, strategists said. Read more: AAA verdict awaited on U.S. debt-limit deal.
“We still believe that the U.S. won’t default, but the market might still be somewhat nervous just in case the House vote today fails,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “On top of this, the U.S. could be downgraded as soon as this week if the deficit plan is deemed to fall short of ratings’ agency wishes.”
The euro EURUSD +0.13% traded at $1.4425, up from $1.4380 late Friday and recovered from losses over the weekend.
The British pound GBPUSD -0.37% slipped 0.1% versus the dollar to trade at $1.6403. Sterling felt pressure after the purchasing-managers index for the British manufacturing sector showed a contraction in activity last month. Read Market Pulse item on U.K. manufacturing PMI.
Of course, the dollar is also viewed as a safe-haven currency, but it has lagged the franc and yen since the debt crisis was focused on the U.S. government, analysts said.
The Australian dollar traded at $1.1055 AUDUSD +0.59% after an official reading of China’s Purchasing Managers’ Index slipped by a smaller-than-expected margin in July. Read more about Chinese PMI.
On Tuesday the Reserve Bank of Australia, or RBA, holds its August policy meeting. Economists widely expect the central bank to keep rates steady at 4.75% at the meeting, according to a survey by Dow Jones Newswires.
Strategists at TD Securities expect the RBA will leave rates on hold, however, adding that “there is a possibility that tightening language might return after just one month’s absence, signaling that a hike is still planned for some time in the next few months.”
William L. Watts is a reporter for MarketWatch in Frankfurt.
Virginia Harrison is a MarketWatch reporter based in Sydney.
