TOKYO: The US dollar was on the run in Asia on Thursday after a ratings warning from Moody's and a hint of further policy easing from the Federal Reserve unleashed a wave of panic selling, much to the relief of the hard-pressed euro.
As fiscal problems hurt not just the euro but also the dollar, traders looked to the Swiss franc as a likely safe haven for investors, boosting the currency to a record high against the dollar and the euro.
The New Zealand dollar was another stand-out performer, soaring to 30-year highs against the greenback after data showed the economy grew far faster than expected in the first quarter, reviving the chance of a rate hike before the year-end.
That stood in stark contrast to the United States, where Fed Chairman Ben Bernanke had canvassed the idea of further quantitative easing should economic growth and inflation slow.
"Three months ago all the focus was on the exit from unconventional policy; now Bernanke mentions the conditional possibility of QE3," said Paul Meggyesi at JPMorgan. "This is unambiguously bad for the dollar and good for risk."
The dollar fell to its lowest level in a week against a basket of currencies, with the dollar index falling as low as 74.690, down 2.6 percent from a four-month peak hit just two days ago.
A fall below trendline support, which comes around the 74.40-45 area this week, could be taken as a sign that the dollar's gradual uptrend since early May has ended, opening the way for a new downtrend just as the Fed's two previous experiments with quantitative easing led to a constant decline in the dollar.
"Now that Bernanke has made it clear that a third round of quantitative easing is possible, any weak reading in US data could boost speculation about easing and is likely to pressure the dollar," said Yunosuke Ikeda, a senior analyst at Nomura Securities.
The US dollar slid to a fresh record low against the Swiss franc around 0.8080 francs , before stepping back up to around 0.8122 franc, which is still 0.8 percent below late US levels.
The euro leaped to $1.4205 for a gain of 0.3 percent, having risen nearly 3 percent from a four-month low hit earlier in the week, when players were frightened by the spectre of the euro zone debt crisis hitting big economies such as Italy and Spain. But it hit another record low against the Swiss franc, dropping as low as 1.1494 franc before bouncing back to around 1.1550.
The dollar fell to a four-month low of 78.45 at one stage, just above a 76.4 percent retracement of its rally after joint intervention by the Group of Seven nations in March before spiking up about a full yen to around 79.60 yen, with traders citing heavy buying from a US bank.
While the sharp price action made traders nervous about intervention from Japanese authorities, many traders think the Bank of Japan was not in the market.
"Lots of people are talking about big one-shot buying from a US bank," said a trader at a Japanese bank.
Japanese Finance Minister Yoshihiko Noda earlier said the yen's rise does not reflect fundamentals but many traders doubt that Japan is ready to intervene to curb the yen's strength at this stage given that the move is driven largely be overall weakness in the dollar, rather than yen-specific factors.
DOUBLE WHAMMY
In a double whammy for the US currency, Moody's warned the country could lose its top-notch credit rating if lawmakers fail to increase the country's debt ceiling.
In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations."
The market has always assumed the spectre of default would force the White House and Republicans to reach a last minute deal by Aug. 2, when the US will run out of funding options, but the talks are not going well.
"Markets seem to think the deal will be reached in time but they may be overlooking the risk of the deal not coming through. And if this put more strains on markets, that will only hasten QE3," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
Indeed, the talks between President Barack Obama and Republican lawmakers on Wednesday became so acrimonious that Obama walked out as they clashed over how to cut budget deficits.
The latest US debt woes were a timely diversion for the euro given that Fitch had just downgraded Greece deeper into junk territory, citing the absence of a new and fully funded financing programme.
But Fitch also indicated that Italy would be able to keep its current credit rating if it stuck to fiscal targets, giving some fillip to Italian and Spanish debt. Some market players think panic over Italy is overdone as the country is seen running a primary budget balance this year.
For now, Italy faces a tough test later on Thursday when it sells up to 5 billion euros of new debt, with dealers expecting it to have to pay high yields to attract demand.
Elsewhere, the kiwi flew as high as $0.8508, a 30-year peak, on the strong reading in New Zealand's GDP. But it gave up much of the gains to last trade at $0.8417, up 0.1 percent on the day.
The currency also gained sharply against the Australian dollar, as rising expectations that rates may rise sooner helped to tighten the Aussie's yield advantage over the kiwi. The Aussie fell 0.5 percent to NZ$1.2730, falling below support from major lows so far this year.
The Aussie slipped 0.3 percent against the US dollar to $1.0720 .
Copyright Reuters, 2011
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