By William L. Watts and Virginia Harrison, MarketWatch
FRANKFURT (MarketWatch) — The dollar fell versus most major rivals on Monday after an unprecedented downgrade of the U.S. government’s credit rating, while the euro erased early gains scored after the European Central Bank was seen aggressively buying Italian and Spanish bonds.
The U.S. dollar index DXY -0.08% , which measures the greenback’s performance against a basket of six other major currencies, traded at 74.223, down from 74.592 in North American trade late Friday.
Against the yen, the greenback USDJPY -0.40% bought ¥77.62, down from ¥78.42, late Friday. The dollar fell to an all-time low versus the safe-haven Swiss franc USDCHF +0.38% near 75.00 centimes, according to FactSet Research data, and traded in recent action at 75.91 centimes, a loss of 0.4% from Friday.
But high-yielding, risk-oriented currencies fell versus the U.S. unit as the dollar found a modicum of safe-haven support of its own as Asian equities plunged and U.S. stock futures pointed to sharp losses on Wall Street. See Indications for more U.S. market action.
“The U.S. dollar still has upside potential as equities struggle, but the underlying lack of confidence in the U.S. and the overhang of diversification pressures on the dollar make it hard to see any major dollar advance,” said Adrian Schmidt, currency strategist at Lloyds Bank in London, in a note to clients.
Late Friday, S&P downgraded the U.S. long-term debt rating to AA+ from AAA with a negative outlook, meaning it can be lowered again within two years. Standard & Poor’s affirmed the U.S. A-1+ short-term rating. Read more about the U.S. debt downgrade.
The euro initially strengthened against the greenback after the European Central Bank signalled late Sunday it would intervene in the bond market and buy Italian and Spanish debt. Read more about the ECB bond buying.
Strategists on Monday said the ECB bought Italian and Spanish bonds from the start of European trading, pushing down yields sharply. The moves helped lift the euro versus the beleaguered dollar, but a move above $1.44 proved too difficult to sustain.
The euro EURUSD -1.04% slipped back to $1.4255 in recent action, down from $1.4269 late North American trading Friday.
The ECB move comes as policy makers attempt to halt a sharp rise in borrowing costs for Italy, the euro-zone’s third largest economy, and Spain, its fourth-largest. A sharp rise in bond yields has stoked fears the countries could be pushed toward default.
“Italy represents the third largest bond market in the world and if the ECB can’t stem the tide of panic selling the continued stress in the euro-zone credit markets will create havoc in the region and could derail the union’s fragile economic recovery as confidence plummets. That’s why the action in the euro-zone credit markets will prove critical to the near-term direction of the EUR/USD today,” said Boris Schlossberg, director of currency research at GFT.
Meanwhile, risk aversion saw high-yielding currencies that typically trade in tune with rising risk appetite levels lose ground versus the greenback. The Australian dollar AUDUSD -0.96% fell 0.6% versus the U.S. unit to trade at $1.0336.
The British pound GBPUSD -0.33% was off 0.1% versus the greenback to change hands at $1.6399.
William L. Watts is a reporter for MarketWatch in Frankfurt.
Virginia Harrison is a MarketWatch reporter based in Sydney.
