Earlier relief for greenback after U.S. debt deal fades
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar turned lower against the safe-haven Swiss franc and Japanese yen on Monday as traders remained worried about whether enough U.S. lawmakers would agree to the latest plan to raise the government’s debt limit and avoid a default.
The dollar initially recovered versus the franc USDCHF -1.76% , rising as high as 79.53 centimes, but turned back down to a fresh low. It recently traded at 77.85 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 -0.80% back above ¥78.00 after Obama’s remarks late Sunday on the debt-ceiling deal. It later retreated to ¥76.77, down from ¥77.01 in North American trade late Friday.
The U.S. dollar, once viewed as the ultimate safe-haven currency, has lagged the franc and yen as the latest debt crisis to shake global markets has focused on the U.S. government’s borrowing ability.
However, the dollar index, which tracks the U.S. unit against a basket of six major currencies including the yen and franc, turned up as the euro gave up gains.
The dollar index DXY +0.31% rose to 73.903, from as low as 73.582 and versus 73.846 late Friday.
The euro EURUSD -0.41% fell to $1.4360, down from $1.4380 late Friday.
The agreement announced Sunday night by President Obama still must be approved by the House and Senate, where votes are expected to take place later Monday. It’s unclear whether enough Democrats and Republicans will approve the plan, which would raise the U.S. debt limit and cut federal spending by around $2.4 trillion in two phases. Read more about the debt deal.
“Investors flocked towards both [the yen] and the Swiss franc for fear of a U.S. downgrade in the event that America’s two parties failed to agree before a looming deadline,” said Andrew Wilkinson, a senior market analyst at Interactive Brokers.
Currency analysts also noted continued concerns that the U.S. government could still lose its AAA credit rating, which would may cap the dollar’s upside potential. See story on rating verdict awaited on U.S. debt 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.”
Moody’s Investors Service declined to comment Monday morning on the tentative deal, but referred back to its latest report it released on the U.S. debt debate, which was published late Friday, according to Dow Jones Newswires.
Treasury bond yields were mostly unchanged, indicating the flow back to riskier assets has been tentative. Yields on benchmark-10-year notes remain near their lowest levels this year. Read more about Treasury bond yields.
Still, the debt deal lifted stock markets in Asia and Europe and U.S. stock markets opened higher, with the Dow Jones Industrial Average DJIA +0.10% recouping some of last week’s losses which were the steepest in more than a year.
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 havens for their stability. Read story about how safe the safe havens are.
“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.
Sterling, Aussie
The British pound GBPUSD -0.67% slipped to $1.6338 from $1.6427 late Friday. Sterling felt pressure after the purchasing-managers index for the British manufacturing sector showed a contraction in activity last month. Read more on U.K. manufacturing PMI.
The Australian dollar AUDUSD +0.05% traded at $1.1042, up from $1.0997 late Friday, after an official reading of China’s Purchasing Managers’ Index slipped by a smaller-than-expected margin in July. Read more about Chinese PMI.
Analysts are holding out hope for positive remarks from the Reserve Bank of Australia, which holds its August policy meeting on Tuesday. 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.”
