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 the euro Friday after another downgrade to Portugal’s credit rating triggered a move that made the country’s bonds less liquid, while a lack of a comprehensive agreement in Brussels on how to deal with the region’s long-running debt crisis weighed on the euro.
The dollar index (DXY 75.90, +0.25, +0.33%) , which measures the U.S. unit against a basket of major rivals, rose to 75.908, from 75.665 in North American trade late Thursday.
The euro (EURUSD 1.4134, -0.0034, -0.2400%) fell to $1.4129, from $1.4181 Thursday.
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 Prime Minister Jose Socrates and fueling speculation that Lisbon would soon be forced to seek an international bailout.
The political fallout came as European Union leaders meeting in Brussels delayed finalizing details of a plan to boost the lending capacity of the euro-zone bailout fund, known as the European Financial Stability Facility.
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.
“Changes to the terms of the bailout package are due to domestic political considerations, as the bailout fund is unpopular in those countries contributing capital,” namely Germany, said strategists at Brown Brothers Harriman. “Political developments can further complicate already difficult negotiations over pending EU issues” involving Ireland’s and Greece’s bailout and anything that Portugal ends up needing.
Despite the turmoil, the euro remains not far from four-month highs above $1.42.
“Without a doubt, the combination of credit-ratings downgrades and political crisis surrounding an EMU member would have been enough to send the euro into free fall during 2010,” said Jane Foley, senior currency strategist at Rabobank.
Keeping the euro up are expectations that the European economic and monetary union will survive the crisis, she said.
Also, traders are betting on the European Central Bank proceeding with an interest-rate hike as soon as next month, which will make European bond yields more attractive relative to yields in other countries.
Another key to the market’s sanguine view of the debt crisis is that people still believe Spain will remain insulated from the crisis and solvent, Foley said.
Meanwhile, U.S. real gross domestic product for the fourth quarter was revised to an increase of 3.1% annualized from the earlier estimate of a 2.8% rise, the Commerce Department said Friday. The revision was in line with forecasts of economists surveyed by MarketWatch. See story on U.S. GDP.
The British pound (GBPUSD 1.6063, -0.0056, -0.3475%) slipped to $1.6083, from $1.6119 late Thursday.
“Hopes during the week have subsided for a yield-boosting interest-rate increase [from the Bank of England] as investors continue to battle with evidence of a weakening growth profile” and a huge overshoot of the central bank’s 2% inflation target, said Andrew Wilkinson, senior analyst at Interactive Brokers in Greenwich, Conn.
The dollar traded at 81.16 Japanese yen (USDYEN 81.2100, +0.2100, +0.2593%) , up slightly from ¥80.98 late Thursday.
Shifts in the yen have been very limited and may stay that way, as the Bank of Japan doesn’t want the currency strengthening too much. Officials went so far as to arrange a coordinated global intervention in currency markets last week to cap the yen.
