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Dollar Falls in Asia as Investors Fret Over Debt Impasse

Sunday, 24 July 2011 03:45 PM

The dollar fell in early trading in Asia Monday as U.S. lawmakers failed to move closer to an agreement raising the nation’s $14.3 trillion debt ceiling, boosting the odds of a default as soon as next week.

America’s currency weakened against the euro, yen and Swiss franc in early Asia-Pacific trading as Republicans prepared to force action on a shorter-term extension of the U.S. debt limit than President Barack Obama has requested, defying a veto threat.

“The U.S. should avoid default but may get downgraded by the ratings agencies if the White House and Congressional Republicans are unable to agree on significant medium term fiscal tightening,” Mansoor Mohi-uddin, the Singapore-based chief currency strategist at UBS AG, wrote in a note to clients.

Against the euro, the dollar weakened to $1.4384 in early trading, from $1.4360 on July 22. The greenback fell to 78.13 yen from 78.54.

Republicans challenged a presidential veto threat by preparing for a short-term extension of the U.S. debt limit, hardening partisan differences in the face of warnings that a stalemate risks roiling financial markets.

Obama would veto a deal to raise the debt ceiling if it doesn’t extend the limit into 2013, White House Chief of Staff Bill Daley said in an interview on NBC’s “Meet the Press” on July 24. Daley warned that “markets around the world” would react negatively to a short-term measure.

‘Prepared to Move’

House Speaker John Boehner, an Ohio Republican, said in a separate interview on the “Fox News Sunday” program that while he’d prefer a bipartisan package, “if that’s not possible,” House Republicans are “prepared to move on our own.” “There is going to be a two-stage process,” Boehner said. “This is about what’s doable.”

Obama reiterated his opposition to a short-term extension of the debt limit in a meeting with congressional leaders, telling them it would be “irresponsible” and “could cause our country’s credit rating to be downgraded, causing harm to our economy,” White House press secretary Jay Carney said in a statement.

Obama says he would veto an increase of the $14.3 trillion debt limit, which Treasury officials project will be exhausted on Aug. 2, unless it extends through the 2012 elections.

The risks that Congress only agrees to limited reductions in the U.S. budget deficit, on the order of $1.0 trillion to $1.5 trillion rather than the $3 trillion to $4 trillion sought by Standard & Poor’s and Moody’s Investors Service suggests that America may lose its AAA rating as early as August, according to Mohi-uddin at UBS.

‘A Blow’

“While clearly a blow to U.S. prestige, the impact on the dollar may be muted,” he wrote. “Central banks will not sell Treasuries given their need to hold foreign exchange reserves in liquid assets. This was backed up by comments this week by South Korean officials stressing that they were not required to hold all their reserves in AAA assets.”

Investors outside the U.S. own $4.51 trillion in U.S. Treasuries, or about 50 percent of the marketable government debt outstanding, according to the Treasury Department.

A ratings downgrade would “modestly raise” the government’s borrowing costs, S&P said. If the U.S. defaults on some obligations after Aug. 2, even if it pays bondholders, S&P forecasts short-term interest rates would rise 0.50 percentage point and long-term interest rates by 1 percentage point.

Tax Receipts

Greater-than-expected tax receipts might give the U.S. Treasury an extra week -- until Aug. 10 -- before exhausting its borrowing authority, analysts with New York-based Barclays Capital said. The government has collected about $14 billion more in tax revenue since July 14 “than we were expecting,” the analysts wrote.

The dollar weakened 1.43 percent last week against the euro after European leaders agreed to a new bailout for Greece and expanded the role of the region’s rescue fund.

“The net-positive performance on the euro is clearly linked to the outcome of the summit and the fact that we’ve seen a reversal in euro peripheral credit markets,” said Ray Attrill, a senior currency strategist at BNP Paribas SA in New York. “Everybody’s expectations in terms of the outcome of the summit were exceeded, and it’s put the onus squarely back on U.S. policy makers.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, ended last week at 74.201 after falling on July 21 to 73.889, the lowest level since June 9. The gauge has ranged over the past three months from as low as 72.696 on May 4 to as high as 76.719 on July 12.

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The dollar fell in early trading in Asia Monday as U.S. lawmakers failed to move closer to an agreement raising the nation s $14.3 trillion debt ceiling, boosting the odds of a default as soon as next week.America s currency weakened against the euro, yen and Swiss franc in...
Sunday, 24 July 2011 03:45 PM
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