Dollar Weakens to Record Versus Franc as S&P Lowers U.S. Rating
Aug. 8 (Bloomberg) -- The dollar dropped to a record low against the Swiss franc and fell for a second day versus the yen after Standard & Poor's downgrade of the U.S. added to concern the fiscal health of the world's biggest economy is slipping.
The greenback weakened against the euro before the Federal Reserve meets tomorrow on monetary policy after S&P cut the U.S. one level on Aug. 5. The euro also advanced after the European Central Bank signaled it's ready to start buying Italian and Spanish bonds to curb the region's debt crisis. The yen gained against most major peers as Asian shares slid for a fifth day, supporting demand for Japan's currency as a refuge.
"We're going to see massive risk off and demand for traditional safe-haven currencies such as the Swiss franc and yen," said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. "This will be a real test of intervention to see whether or not officials can withstand the safe-haven flows that may head their way."
The dollar fell to as low as 74.85 Swiss centimes before trading at 75.56 centimes as of 6:49 a.m. in London from 76.74 in New York on Aug. 5. The U.S. currency weakened to 77.89 yen from 78.40 last week. Against the 17-nation euro, it declined to $1.4339 from $1.4282. The euro fetched 111.68 yen from 111.97.
S&P Outlook
S&P kept the outlook on the U.S. rating at "negative" as it became less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA from AA+ within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based company said on Aug. 5 after markets closed.
Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse that had pushed the Treasury to the edge of default. Moody's and Fitch also said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.
S&P's move "highlights the much-less advanced pace of fiscal consolidation in the U.S., relative to Europe and the U.K.," John Normand, the London-based global head of foreign- exchange strategy at JPMorgan Chase & Co., wrote in a report to clients.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, fell for a second day, slipping 0.5 percent to 74.234.
Fed policy makers may address chances of further slowdown when the Federal Open Market Committee releases a statement tomorrow. Chairman Ben S. Bernanke told Congress on July 14 that central bank officials want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.
G-7 Statement
Group of Seven nations sought to head off a collapse in global investor confidence, saying in a joint statement today that they will take every action necessary to stabilize financial markets. Members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary, Japanese Finance Minister Yoshihiko Noda said in Tokyo after a conference call with G-7 representatives.
"There were no concrete measures announced by the G-7, but the conference call itself gave the market a favorable impression that they will try to avoid volatility in the currency market," said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan's largest online currency broker. "Buying of yen against the dollar has calmed down."
Japan Intervention
Japan may have spent a record amount intervening to stem the yen's gains on Aug. 4, based on a projection of deposits held by financial institutions at the Bank of Japan. Noda said last week's action was unilateral. A day earlier Switzerland unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to curb its appreciation.
"The dollar was initially weaker against the yen and Swiss franc, but both those losses are being contained somewhat by the heightened intervention risks," said John Horner, a currency strategist at Deutsche Bank AG in Sydney.
The MSCI Asia Pacific Index of regional shares, which last week entered a so-called correction after falling more than 10 percent from its May peak, slumped 3 percent. S&P 500 futures expiring in September slid 2.8 percent.
ECB Purchases
The Australian dollar dropped 1.9 percent to 80.33 yen and declined 1.2 percent to $1.0314. New Zealand's currency sank 2.4 percent to 64.51 yen and 1.8 percent to 82.84 U.S. cents.
For risky currencies such as the Australian dollar to fall further, global equity markets will likely need to extend declines, Horner said. "A lot of that's going to depend on how European bond markets react over the next few days."
The euro rose for a second day against the greenback after the Frankfurt-based ECB said it welcomed Italy and Spain's efforts to reduce their deficits and will "actively implement" its bond-purchase program.
In a statement issued yesterday in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the ECB called on all euro-area governments to follow through on measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
"A possible ECB intervention in the Italian and Spanish bond market tonight would be positive for the euro," said Imre Speizer, an Auckland-based strategist at Westpac Banking Corp., Australia's second-largest lender.
Policy makers are being forced to step up their response after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. Italian and Spanish 10-year yields reached euro-era records last week.
Bearish Bets
Traders cut bearish bets on the dollar last week from the highest level in more than two months as concern eased that a political stalemate in Washington on raising the U.S. debt limit would erode the value of the world's reserve currency.
Aggregate wagers against the greenback fell for the first time since the period ended July 1, dropping to 307,321 contracts from 310,222, data from the Commodity Futures Trading Commission in Washington show. Futures traders added to bets the dollar will weaken against the yen, Swiss franc, Canadian dollar, U.K. pound, New Zealand dollar and ruble. Wagers on a drop versus the euro, Australian dollar and Mexican peso were trimmed.
Status 'Slipping'
Volatility in currency markets rose last week to the highest since March, with the JPMorgan Global FX Volatility Index reaching 12.31 on Aug. 4 before easing to 12.18 a day later.
The committee of bond dealers and investors that advises the U.S. Treasury said the dollar's status as the world's reserve currency "appears to be slipping," in quarterly feedback presented to the government on Aug. 3.
The U.S. currency's portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
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