Supercommittee deadlock, China warning dent risk appetite
By William L. Watts and Virginia Harrison, MarketWatch
FRANKFURT (MarketWatch) — The dollar reversed early weakness versus the euro on Monday, with the shared currency losing ground after ratings firm Moody’s reiterated concerns about France’s AAA credit rating as rising bond yields show Europe’s debt crisis has infected the core of the euro zone.
The euro EURUSD -0.33% traded at $1.3449, down from $1.3510 in North American trading late Friday. The euro didn’t get a lasting lift from a sweeping victory Sunday by Spain’s conservative opposition party in general elections. Read more on the Spanish elections.
Spanish bond yields resumed their rise in the wake of the election, with the 10-year yield ES:10YR_ESP -2.98% up 7 basis points at 6.43% in recent action.
Borrowing costs rose sharply last week even for AAA-rated countries, such as Finland and the Netherlands, while AAA-rated France saw the extra yield investors demand to hold its 10-year bonds FR:10YR_FRA -6.51% over German bunds DE:10YR_GER -3.31% top 2 percentage points, a euro-era high.
That brought a warning Monday from Moody’s Investors Service, which repeated in a weekly credit update that its stable outlook on France’s rating could be endangered if the rise in its borrowing costs is sustained.
“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenge the French government faces amid a deteriorating growth outlook, with negative credit implications,” wrote Alexander Kockerbeck, senior credit officer at Moody’s. Read Market Pulse on danger to France’s rating outlook.
In the U.S., news reports said that efforts to agree on a plan to lower the deficit by the congressional supercommittee were near collapse, potentially triggering automatic spending cuts across government departments. Read more: Deficit supercommittee reportedly to admit failure.
Meanwhile, a warning by Chinese Vice Premier Wang Qishan that the world is likely to see a prolonged recession helped undercut overall risk appetite, weighing on equities and buoying the dollar on safe-haven flows, analysts said. Read more: Beijing wary of global slowdown.
The dollar index DXY +0.41% , which tracks the performance of the greenback against a basket of six other major currencies, rose to 78.382, up from 78.098 in North American trade late Friday.
“Failure of the [deficit-reduction] supercommittee to agree on a proposal, or Congress rejecting such a proposal, would be a blow for risky assets globally, especially given the backdrop of euro-area uncertainty and market stress,” Barclays Capital strategists said.
“Higher risk aversion would be a U.S. dollar negative against the Japanese yen, but positive versus risky currencies,” they said, adding that “any agreement this week should be received positively, lifting the U.S. dollar.”
Against the Japanese yen USDJPY -0.01% , the greenback bought ÂĄ76.88, down from ÂĄ76.96 in North American trade late Friday.
Meanwhile, the British pound GBPUSD -1.03% traded at $1.5676, down from $1.5781 in North American trade late Friday.
William L. Watts is a reporter for MarketWatch in Frankfurt.
Virginia Harrison is a MarketWatch reporter based in Sydney.
