Bloomberg News

Dollar Declines to Record Versus Franc on U.S. Deficit Deadlock

July 26, 2011

July 26 (Bloomberg) -- The dollar fell against all of its most-traded counterparts as politicians struggled to agree on raising the U.S. debt ceiling and reducing its deficit.

The greenback slid below 78 yen for the first time since March and fell to a record versus the Swiss franc on concern America may default and face a reduction in its credit rating. The pound rallied to a one-month high against the dollar after the U.K.’s economic growth matched the forecasts of analysts. Sweden’s currency gained as producer prices increased.

“The dollar is selling off and will weaken every single day until we have some sort of resolution,” said Greg Salvaggio, senior vice president of capital markets in Washington at the currency-trading firm Tempus Consulting Inc. “The bigger issue is not necessarily the deal, it’s the scope of the deal. Without $3 trillion in cuts or deficit reductions, there’s a high probability S&P will downgrade U.S. debt, and then all bets are off.”

The dollar fell 0.5 percent to 77.89 yen at 5 p.m. in New York, from 78.29 yesterday, after sliding to 77.83, the lowest level since March 17. The greenback dropped 0.6 percent to 80.13 Swiss centimes after touching the all-time low of 79.98. The dollar slid 0.9 percent to $1.4511 versus the euro after reaching $1.4526, the weakest since July 5.

Sterling climbed 0.8 percent to $1.6405 after touching $1.6429, the highest level since June 14. The U.K.’s economy grew 0.2 percent in the second quarter, matching the median forecast of 32 economists in a Bloomberg News survey.

‘Flicker of Hope’

“The market was positioned for a weak number, so this flicker of hope that the U.K. isn’t about to fall back into recession helped boost sentiment to sterling,” Kathleen Brooks, London-based research director at Forex.com, a unit of the online currency trading company Gain Capital Holdings Inc., wrote in a client note today.

The Swedish krona appreciated for the first time in three days against the dollar and euro as a gauge of inflation rose, supporting the case for higher interest rates. Producer prices advanced 0.1 percent in June after sliding 0.9 percent in May, Statistics Sweden said.

Sweden’s currency climbed 1.5 percent to 6.2434 against the dollar after reaching 6.2384, its strongest level since July 4. The krona gained 0.6 percent to 9.0601 against the euro.

“With all the focus on the sovereign-debt issues, you always had the Scandinavian currencies, which were on better footing, so they gained some traction,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “More and more people are getting bearish on the dollar, given the uncertainty.”

Dollar Index

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell 0.7 percent to 73.526, from 74.064, after touching 73.446, the lowest level since May 5.

President Barack Obama said yesterday the U.S. may experience a “deep economic crisis” if leaders fail to reach a compromise on spending cuts and the nation defaults. Obama blamed the stalemate on a group of Republicans in the House who are insisting on budget cuts and no tax increases.

“If we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy,” Obama said in a prime-time address from the White House.

Democrats and Republicans are struggling to reach an agreement to raise the nation’s $14.3 trillion debt ceiling by an Aug. 2 deadline. Standard & Poor’s reiterated last week that there’s a 50 percent chance the company will lower the U.S. credit rating from AAA within three months.

Yen Outlook

Gains in the yen were limited on speculation Japan’s officials will intervene to weaken the currency and aid the export-driven economy, according to analysts.

Finance Minister Yoshihiko Noda said currency moves have been one-sided and he will continue to watch the yen closely. Bank of Japan Governor Masaaki Shirakawa said yesterday that the yen’s strength may hurt the economy and the central bank is ready to take appropriate action as needed.

There were no signs Japan’s central bank intervened in currency markets today to weaken the yen, according to traders. Japan’s currency slid from 78.10 per dollar to 78.70 within a minute at about 11:06 a.m. in Tokyo before rising again. Group of Seven nations sold the yen on March 18 after it reached a postwar record of 76.25 to the dollar the previous day.

The strategists who predicted this month’s tumble in the lira say more declines are likely as Turkey’s failure to cut its record current-account deficit erodes investor confidence.

The Turkish lira has dropped 5.3 percent this month, the biggest fall worldwide, and strategists who predicted this month’s tumble in the currency say more declines are likely as Turkey’s failure to cut its record current-account deficit erodes investor confidence.

Royal Bank of Scotland Group Plc and Societe Generale SA say the lira may drop as much as 4.8 percent to 1.80 per dollar.

Turkey’s central bank kept benchmark borrowing costs at a record low for a sixth straight month on July 21, counting on a weaker lira to narrow the current-account gap by boosting exports and making imports more expensive. The strategy has proven unsuccessful as the 12-month deficit widened to $68.2 billion in May.

--With assistance from Yoshiaki Nohara in Tokyo and Lukanyo Mnyanda in Edinburgh. Editors: Dennis Fitzgerald

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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