Bloomberg News

Dollar to Slide as Reserve Status ‘Undermined’, Sumitomo Says

July 14, 2011

July 14 (Bloomberg) -- The U.S. dollar will extend its drop amid increasing pressure on U.S. lawmakers to raise the government’s debt limit, said Sumitomo Trust & Banking Co, a unit of Japan’s second-biggest lender.

Moody’s Investors Service put the U.S., rated Aaa since 1917, on review today for the first time since 1995 on concern the debt threshold won’t be raised in time to prevent a missed payment of interest or principal on bonds and notes. President Barack Obama and congressional leaders are struggling to reach a compromise on reducing deficits and raising the $14.3 trillion federal debt ceiling before the government exceeds its borrowing authority on Aug. 2.

The Federal Reserve is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling, central bank Chairman Ben S. Bernanke said yesterday, also curbing the appeal of the greenback as a refuge.

“Dollar-negative factors have piled up, including the very urgent issue of the debt ceiling,” said Ayako Sera, a Tokyo- based strategist at Sumitomo Trust, which manages the equivalent of $310 billion. “It will add to the already accelerating trend over the past few years of seeking to diversify foreign-currency reserves. Buying yen and euro instead is the only choice with the dollar’s reserve status being undermined. We’re reluctant to buy dollar assets at the moment.”

The U.S. currency fell 0.4 percent to 78.67 yen as of 3 p.m. in Tokyo after reaching 78.47, the lowest level since March 17. It declined to $1.4211 per euro from $1.4167 in New York yesterday.

Forecast Change

Sumitomo’s Sera said she may need to change her forecast for the dollar to trade in the mid-80s by the start of 2012, from an earlier projection for it to climb to 88 yen.

The dollar’s share of global currency reserves dropped in the first quarter to 60.7 percent, the lowest level since March 31, 1999, International Monetary Fund data showed last month.

Obama is considering summoning congressional leaders to Camp David this weekend to work on a plan to raise the debt ceiling after yesterday’s negotiations on a deficit-cutting plan of at least $2 trillion stalled, according to two people familiar with the matter.

U.S. policy makers “will reach an agreement in the last minute, and it’s not going to change the world,” said Sydney- based Shane Oliver, head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “They’ll do something. It would be hard to imagine them not because that would cause some serious consequence.”

“The U.S. dollar is going to be bouncing around” as the market’s focus swings between Euro’s debt crisis and issues in the U.S., he said.

--Editors: Garfield Reynolds, Naoto Hosoda

To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net


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