Tags: Dollar

Dollar Gains as Greece's Debt Woes Get Worse

Wednesday, 28 Apr 2010 07:50 AM

The dollar surged Tuesday against the euro and pound after Greece's credit rating was downgraded to junk status and Portugal's debt was lowered on fears the trouble could spread.

Markets were also awaiting the decision of the Federal Reserve, expected Wednesday, on U.S. interest rates.

In late New York trading, the euro slid to $1.3184 from $1.3383 late Monday, while the British pound fell to $1.5258 from $1.5378.

The dollar slipped to 93.15 Japanese yen from 93.93 yen. Investors tend to buy the low-yielding yen as well as the dollar on a safety bid in times of turmoil.

Standard & Poor's downgraded its credit rating on Portugal Tuesday amid mounting concerns about the country's ability to get a handle on its debt load, saying that the two-notch downgrade to A- reflects its view of "the amplified risks" that Portugal faces.

The agency later said it was lowering its rating on Greece's debt and warned debtholders that they only have an average chance of between 30 to 50 percent of getting their money back in the event of a debt restructuring or default.

While Greece last Friday requested funds from a bailout package worth nearly $60 billion from European countries using the euro and the International Monetary Fund, some European parliaments must still approve the aid. Timing on the delivery of funds is uncertain before a payment of 8.5 billion euros on a 10-year bond due May 19.

Moreover, Greece needs to come up with about 30 billion euros this year, according to Citigroup economist Willem Buiter, who added its current cost of borrowing is not sustainable.

Debt woes that threaten to hurt the economic recovery in the countries using the euro have driven the shared currency down from its level above $1.51 last November.

These concerns could drive the euro below its low for the year of $1.3202 hit last Friday, said Matthew Strauss, a senior currency strategist at RBC Capital in Toronto.

In other trading Tuesday, the dollar rose to 1.0155 Canadian dollars from 99.97 Canadian cents, and gained to 1.0858 Swiss francs from 1.0726 Swiss francs.

The dollar was also broadly higher against emerging-market currencies in Asia, the Middle East and Latin America as fears of a Greek default drove investors to seek safety in the U.S. currency.

Meanwhile, markets are also awaiting a verdict on interest rates. The Fed is expected to announce its decision on Wednesday. It has held rates at a range near zero since December 2008 in order to fuel economic activity.

Fed officials have begun to sound more confident about the economic recovery, and may change their language on interest rates to signal an increase later this year.

Higher rates help boost the value of a currency.

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