Supercommittee deadlock, China warning dent risk appetite
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar rose to a six week high against major currencies on Monday as the inability of U.S. lawmakers to agree on deficit-cutting measures and a continued rise in European bond yields left investors shifting into assets deemed safer to hold in times of trouble, including the greenback.
The euro’s decline also followed renewed concerns from Moody’s reiterated concerns about France’s AAA credit rating.
The euro EURUSD -0.50% fell to $1.3464, near its lowest levels since early October, from $1.3510 in North American trading late Friday.
The dollar index DXY +0.52% , which tracks the performance of the greenback against a basket of six other major currencies, rose to 78.378, up from 78.098 Friday.
Against the yen USDJPY +0.07% , the greenback bought ÂĄ76.88, down from ÂĄ76.96 in the prior session.
“The dollar is higher across the board except against the Japanese yen, which is similarly benefitting from the ongoing flight to safety,” said Andrew Wilkinson, chief economic strategist at Miller Tabak. “For want of a better distraction, the failure of the super committee in Washington to agree on something better than automatic spending cuts is also seen as the heavyweight woe on sentiment.”
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, reports said. The lack of a plan raised concerns that U.S. lawmakers aren’t willing or able to make the budget decisions necessary to keep its AAA rating. See story on deficit supercommittee.
“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.”
Also worrying, the euro didn’t get a lasting lift from a sweeping victory Sunday by Spain’s conservative opposition party in general elections, which is expected to bolster the prospects of fiscal eform in one of the euro zone’s largest ailing economies, 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 -2.82% up 19 basis points, or 0.19%, to 6.54%. Read more on Spanish bond yields.
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 -6.56% over German bunds DE:10YR_GER -3.39% 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 more on Moody’s, France’s rating.
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 about China’s recession outlook.
The British pound GBPUSD -1.12% traded at $1.5637, down from $1.5781.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in Frankfurt. Virginia Harrison in Sydney contributed to this report.
