Bloomberg News

Dollar Falls to Record Against Aussie, Kiwi on Debt Deadlock

July 27, 2011

July 27 (Bloomberg) -- The dollar slumped to record lows against the Australian and New Zealand currencies as President Barack Obama and lawmakers struggled to end an impasse over raising the U.S. debt limit and preventing a default.

The euro fell against the yen and retreated from a three-week high versus the dollar as Germany’s Finance Minister Wolfgang Schaeuble said his country opposes a “blank check” for the euro-area rescue fund to purchase bonds on the secondary market. The dollar touched a four-month low against the yen and approached a three-year low versus the Canadian dollar.

“The foreign-exchange market is acting like this is the only thing going on in the world,” said Kathleen Brooks, research director in London at Forex.com, a unit of the online currency trading company Gain Capital Holdings Inc., referring to the U.S. debt impasse.

The dollar slipped 0.1 percent to 77.81 yen at 7:11 a.m. in New York, from 77.88 yesterday, after touching 77.57, the lowest level since March 17. The euro dropped 0.3 percent to $1.4472, from $1.4511, after touching $1.4536, the highest since July 5. The euro slid 0.4 percent to 112.59 yen, from 113.01.

The U.S. currency sank to a record 87.66 cents per New Zealand dollar before trading at 87.47 cents, down 0.5 percent. The greenback dropped to a record $1.1081 against the Australian currency before trading at $1.1047.

Obama Veto Threat

The Obama administration threatened a veto of House Speaker John Boehner’s two-step plan to raise the $14.3 trillion debt ceiling and cut $3 trillion in expenditure. A vote on the measure had been scheduled for today and was postponed until tomorrow. Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default on Aug. 2.

A cut of the top AAA credit rating for the U.S. would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said yesterday on a conference call hosted by the Securities Industry and Financial Markets Association. A basis point is 0.01 percentage point.

Standard & Poor’s reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and said it may cut the nation as soon as August.

“Looking for catalysts to sell the dollar is no problem at all,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “If politicians fail to reach an agreement, dollar selling will accelerate. Even if they do agree, spending cuts will slow the U.S. economy.”

Canadian Dollar

The Canadian currency gained 0.3 percent to 94.19 cents per U.S. dollar after appreciating yesterday to 94.07 cents, the strongest level since November 2007. The U.S. dollar was little changed at 80.07 Swiss centimes after touching an all-time low of 79.96 centimes.

Orders for U.S. durable goods rose 0.3 percent in June after a 2.1 percent gain the previous month, according to the median forecast of 76 economists in a Bloomberg News survey before today’s report from the Commerce Department.

The euro fell against most of its 16 major counterparts tracked by Bloomberg after Schaeuble echoed remarks by Chancellor Angela Merkel, who said a day after the July 21 summit of European leaders that she’s opposed to allowing the currency region’s 440 billion euro ($637 billion) fund unconditional bond-buying in the secondary market.

‘Tight Conditions’

“In the future such purchases must only take place under very tight conditions, when the ECB establishes that there are extraordinary circumstances in financial markets and dangers to financial stability,” Schaeuble said in a letter to German lawmakers summarizing the results of the summit.

The euro advanced last week after European leaders agreed to a new bailout for Greece and expanded the role of the region’s rescue fund.

Bank of Japan board member Hidetoshi Kamezaki today said he’s watching the yen’s gains with great caution as they could damage the economy. The BOJ will take needed policy action proactively, he said.

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, saying in a statement they wanted to reduce “excess volatility and disorderly movements.”

Japan’s Finance Ministry sold 692.5 billion yen ($8.9 billion) that month in its first intervention since a unilateral action in September.

“I guess Japan has already got a nod from the U.S. on an independent intervention,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. a currency margin company. “It won’t come about straight away, but preparations must have been done.”

--With assistance from Yoshiaki Nohara in Tokyo and Candice Zachariahs in Sydney. Editors: Dennis Fitzgerald, Keith Campbell

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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