Dollar drops on debt gridlock, grim GDP data

NEW YORK: The dollar fell against other major currencies Friday under pressure from a political stalemate over raising the US debt ceiling and weak data on US economic growth.

The euro rose to $1.4395 around 2100 GMT, from $1.4324 at the same time Thursday.

The dollar also weakened sharply against the Japanese currency, fetching 76.73 yen compared to 77.74 yen. That was the lowest level since mid-March, when the greenback set a record post-World War II nadir of 76.25 yen.

"Going into this weekend, all eyes are on whether US policy makers are able to salvage an agreement to stave off the risk of a US debt default by the world's largest economy," said Samarjit Shankar, at Bank of New York Mellon.

"Until there is any semblance of clarity on this issue, investors are likely to remain firmly in risk-off mode."

The US Treasury says that if the government's $14.29 trillion debt ceiling is not raised by Tuesday, it could be forced to default on its obligations -- and possibly its debt -- which would have disastrous effects on financial markets.

The Democrat-controlled Senate and the Republican-led House of Representatives remained at loggerheads over deficit-reduction measures tied to raising the debt limit.

The yen and the Swiss franc, both favored havens from risk, strengthened as investors worried about the European debt crisis and the potential for a disastrous US debt default or credit downgrade.

Surprisingly weak data on the US economy added to the market jitters.

The US Commerce Department said that gross domestic product grew only 1.3 percent in the second quarter, much weaker than analysts expected. It also slashed its first-quarter estimate, from 1.9 percent to 0.4 percent.

For the first half of the year, growth was below 1.0 percent, raising concerns about a return to recession.

"The dollar is looking less and less attractive from a growth, fiscal and monetary perspective," said Kathy Lien at GFT.

"The recovery has lost momentum, the US is up to its neck in debt and the Federal Reserve is considering more stimulus. If the US loses its prized AAA rating, it will truly be the straw the broke the dollar's back."

In late New York trade, the dollar was at 0.7852 Swiss francs, down from 0.8010 Thursday.

The British pound firmed to $1.6418 from $1.6361 the previous day.

Copyright AFP (Agence France-Presse), 2011