Wednesday, Jul 27, 2011

--Dollar gains ground despite US debt impasse

--Euro zone fiscal worries still linger after EU summit

--Common currency to see more pressure 


 
   By Dawn Kissi 
   Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar strengthened slightly Wednesday, despite the continuing concern that the U.S. debt ceiling may not be raised by August 2. Renewed worries over the specifics of the proposed rescue package for Greece weakened the euro.

The dollar has been under pressure as international investors began to price in a possible U.S. sovereign ratings downgrade. Earlier this week the greenback slid against every actively traded G10 and developing-market currency, sending Washington a message that the reach of the U.S. debt impasse stretches far and wide, but it recovered in Wednesday trading as European fiscal worries re-surfaced.

The dollar began Wednesday's session weaker, as markets started to face the new reality, given the increasing risk of a ratings downgrade below triple-A and the possibility the U.S. could eventually stumble into default.

"If the U.S. were to default on its loans, there would be significant carnage in both the currency and equity markets," Kathy Lien, Director of Global Research and Analysis GFT Forex. "Think in terms of at least another 5% slide in the greenback."

It is more likely that the U.S. Treasury will apply money used for non-essential programs to service the government's debt, in turn buying the U.S. government some more time to come up with a longer term deficit reduction program. If no deal is reached by the weekend, analysts say, the chance of a deal being reached at all is slim. "Instead of carrying the risk into Aug. 2, foreign investors will most likely reduce their holdings of U.S. dollars in anticipation of a U.S. downgrade," Lien said.

Even though a downgrade would be very bearish for the U.S. dollar, a buyers' strike in U.S. Treasurys is unlikely, according to Lien, given that central banks with foreign-exchange pegs still need to buy U.S. Treasurys and in turn U.S. dollars to prevent a rapid appreciation of their currencies.

Across the Atlantic, remarks made by European Central bank president Jean-Claude Trichet to France's Le Point magazine didn't do much to ease worries over the euro.

Trichet defended the strength of the euro as a currency, and said it had "never been under threat," even as the euro zone's financial stability was threatened by Greece's fiscal problems. "The euro, as a currency, is sound and credible, and is not affected by the pressures on sovereign risks," Trichet said.

However, Trichet's comments had no positive impact on the common currency as it slid Wednesday afternoon in New York trading, hitting a session low of $1.433 against the dollar.

Greece has been given some breathing room by way of a new rescue package, but the proposed EUR 109 billion bailout is not a game-changer, according to some market analysts, in terms of the solvency and sustainability of its debt, or for the government's ability to move forward with new reforms. Markets were reminded of this Wednesday by ratings agency Standard& Poor's, who downgraded Greece one notch and placed a negative outlook on the country. To that extent, there will be bumps in the road that will hamper any rallies of the common currency, particularly as worries persist over other European nations.

"The movements of the euro from hereon will be dependent more on the contagion risk to Italy and Spain than developments in Greece," Thanos Papasavvas, Fixed Income and Currency strategist with Investec Asset Management said. "What the politicians have not dealt with yet, however, is the mechanism by which they contain a loss of confidence in the larger countries."

Late Wednesday the euro was at $1.4363 from $1.4511 late Tuesday according to EBS via CQG. The dollar was at Y77.98 from Y77.87, while the euro was at Y112.02 from Y113.00. The U.K. pound was at $1.6326 from $1.6412. The dollar was unchanged at CHF0.8015.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.087 from about 73.474.

-By Dawn Kissi, Dow Jones Newswires; 212-416-2814; dawn.kissi@dowjones.com

(END) Dow Jones Newswires

July 27, 2011 17:03 ET (21:03 GMT)