Debt deadlock dents dollar, lifts Swiss franc, yen

LONDON: The dollar fell to a record low against the Swiss franc and a four-month low against the yen on Wednesday as talks aimed at averting a US debt ratings downgrade or default remained deadlocked.

With Democrat and Republican lawmakers still unable to agree on a plan to raise the government's $14.3 trillion debt ceiling before an Aug. 2 deadline, the dollar stayed close to a three-month low versus a currency basket, More dollar falls were seen likely if no deal is reached.

The Australian dollar was the main outperformer against the greenback, surging 1 percent to a 29-year high of $1.1081 as strong Australian inflation data revived the chances of an interest rates hike.

"As long as the uncertainty over the discussions on the US debt ceiling continue it's a clear dollar negative. No one wants to hold dollars at the moment," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The Swiss franc and yen gained strongly as investors sought perceived safer alternatives to the dollar, raising concerns the Japanese authorities may intervene to stem yen gains.

Finance Minister Yoshihiko Noda repeated on Tuesday his mantra about closely watching "one-sided" moves, while sources familiar with matter said Japan's policymakers see solo market intervention as an increasingly viable option.

Analysts viewed intervention as unlikely given that dollar/yen falls have been orderly but said officials were likely to ratchet up the rhetoric and that fear of action may help limit the yen's rise. Japan intervened to curb yen strength in March.

The dollar fell 0.3 percent to a four-month low of 77.57 yen , just shy of a reported option barrier around 77.50. It was last down 0.2 percent at 77.73 yen.

"The yen is one of the least ugly currencies at the moment," said Bank of New York Mellon analyst Neil Mellor, adding that Japan's substantial external assets and a banking sector relatively unscathed make the yen "a good bet".

He said BNYM's custodial flows data showed net purchases of the yen have been rising since early May.

The dollar also fell to a fresh record low of 0.7996 Swiss francs on the EBS trading platform. Falls stalled ahead of a reported options barrier at 0.7990, with traders citing bids around that level, but analysts said a sustained break below 0.80 francs could cause the dollar to extend its decline.

Analysts polled by Reuters expect the United States will probably lose its AAA credit rating from at least one major rating agency and believe the wrangling over the debt ceiling has already damaged the economy.

However, most in the market held out hope the log jam could still be broken.

EURO ZONE CONCERNS

The euro came off a three-week high on concerns a new Greek bailout plan may not be sufficient to prevent contagion to other larger euro zone economies, though it remained only a cent below the early July high around $1.4577.

The euro fell 0.2 percent to $1.4485, having earlier climbed to $1.4537. Traders cited offers in the $1.4550 to $1.4580 area.

The euro's falls followed comments by German Finance Minister Wolfgang Schaeuble that Berlin was against a carte blanche for the euro zone's rescue fund to purchase bonds in the secondary market.

The remarks pushed Spanish and Italian bond yields higher.

The drop in the euro helped push the dollar index off its lows. It was last up 0.1 percent at 73.555, off an earlier three-month trough at 73.421, though traders said it was likely to keep falling to its post-Lehman low of 72.696 hit in May.

"The euro and the dollar are two currencies with quite sore fundamentals and it is difficult to be upbeat about either," Nordea's Christensen said.

Copyright Reuters, 2011