Dollar slides as US, debt tensions escalate

NEW YORK: The dollar struggled across the board on Tuesday as negotiations to raise the US debt ceiling dragged on, stoking default fears and further dimming the greenback's prospects.

The US currency hit a fresh record low against the Swiss franc, a traditional safe haven, falling below a key option barrier at 0.80. It also dropped to a new four-month trough versus the yen and a three-week low versus the euro.

A warning from President Barack Obama that failure to raise the US borrowing limit by an Aug. 2 deadline would severely hurt the nation sparked selling of the dollar, tarnishing its safe-haven status.

Most markets participants, however, are expecting a debt agreement in some shape or form, and are quite unprepared if Congress fails to strike a agreement.

"What the market is not pricing in is 'no deal'. Everyone thinks there's going to be a deal, so I would be very careful about selling the dollar too much," said Geoffrey Yu, senior currency strategist, at UBS in Stamford, Connecticut.

Yu added that he would still sell dollar/Swiss and marginally sell dollar/yen until Japan intervenes, "but if things go wrong the dollar could rally on risk aversion."

A debt default would ramp up the cost of US government borrowing and could lead to a loss of faith in liquid US assets as one of the safest destinations for investors, which would trigger more selling in the dollar.

The dollar's record low versus the Swiss franc was at 0.79970 on trading platform EBS. It was last at 0.80260 franc, down 0.4 percent on the day, with losses of 4.5 percent so far this month.

Traders see the possibility that the US currency could fall as low as 0.7600 franc in the near term, while analysts said the Swiss National Bank was unlikely to enter the market to weaken its currency despite its elevated levels.

The dollar also suffered against the yen, another safe-haven rival. It fell to 77.883 yen, its weakest since mid-March, when major central banks acted in concert to stem the yen's rise. It pulled back to 78.070 yen, down 0.3 percent.

Given deteriorating dollar sentiment, traders said the US currency could test 76.25 yen -- an all-time low hit earlier this year -- in the next week.

The dollar's slide has raised concerns Japanese authorities may enter the market to stem yen strength and sources familiar with Japanese currency policy said policymakers are becoming increasingly alarmed by persistent yen rises.

US TREASURY AUCTION

Also in focus was a series of US Treasury auctions this week, beginning with an offer of two-year notes later in the day. Market participants said weak demand for short-dated paper would offer another cue to sell the dollar.

Treasuries have taken a slight hit in past sessions, which has raised yields and expanded the spread between US 10-year yields and their German counterparts to about 24 basis points, according to Reuters data.

"We've been seeing a blowout in the spread between Treasuries and Bunds and what that suggests is that the perceived risk between them has widened to the detriment of Treasuries," said Adam Myers, currency strategist at Credit Agricole CIB.

But he said the move would be short-lived as US assets were likely to survive the latest shake-up of market confidence with their safe-haven status intact, even if the US can only secure a short-term funding solution to its debt problems.

The euro traded as high $1.45229, its strongest since July 5. It was last at $1.44651, up 0.6 percent on the day.

Against a currency basket, the dollar fell 0.5 percent to 73.683.

The dollar also depreciated against commodity currencies considered to be higher risk.

The New Zealand dollar clocked a post-float high of US$0.8743, while the Australian dollar rallied to US$1.0965, its strongest since May. The greenback also fell to C$0.9407 versus the Canadian dollar, its lowest since November 2007.

Copyright Reuters, 2011