Friday, July 15, 2011

Standard & Poor's Warning Downgrade U.S. Government Debt

Previous session overview
The dollar rose slightly in afternoon Asian trade Friday after receiving a morning jolt following a warning from Standard & Poor's that it may downgrade U.S. government debt. 

The move comes after Moody's said on Wednesday that its long-term rating on U.S. Treasurys was now under review for a possible downgrade. Both agencies have long given U.S. debt their highest Triple-A ratings. 

S&P said that in recent months, the political debate has "only become more entangled."
The dollar dove on the news, dropping to JPY78.89 from JPY79.15 just before the announcement. 

However, the greenback quickly retraced its losses. As of 0450 GMT, the dollar was at JPY79.22 from JPY79.12 in late New York trade Thursday. 

The moves were mirrored in the euro, which jumped to USD1.4199 from USD1.4155. By 0450 GMT it was mid-range at USD1.4175, compared with its late New York quote of USD1.4146.

Among other pairs, the euro was at JPY112.30 from JPY111.90 in late New York trade. The U.K. pound was at USD1.6160 from USD1.6136. Against the Swiss franc, the dollar fell to CHF0.8148 from CHF0.8164. The ICE Dollar Index was at 75.113 from 75.208. 

The Australian Dollar tracked the Euro lower on profit taking and then hit day lows after Bernanke signaled QE3 was not on the table currently. Interest to buy on dips is still evident and the prices of some crosses are still attractive with AUDJPY under JPY85.
Market expectation
The embattled euro is struggling a bit higher against the pound and the dollar, which itself faces considerable headwinds over the U.S. debt impasse even after Fed Chairman Bernanke deflated hopes for more monetary stimulus. 

The focus may turn back to the euro zone's struggles, said dealers.

The EURUSD is down, tracking declines in the AUD, reflecting investor risk aversion, two traders say. Traders tip the EUR in a USD1.4100-USD1.4200 range before the release of the outcome of stress test for European banks later in the global day. The pair is at USD1.4159. Other traders say the AUD is being pressured after Westpac Bank forecast a 25 bp easing by the RBA in December, followed by 100 bps in 2012.

European stocks are set to open lower Friday, as another warning by a ratings agency on U.S. government debt, together with Federal Reserve Chairman Ben Bernanke deflating expectations of additional monetary stimulus, damp sentiment.

On the economic agenda, the Eurozone will publish trade balance data at 0900 GMT. In the U.S., consumer prices inflation for June is at 1230 GMT together with the Empire State manufacturing reading. Industrial production data follows at 1315 GMT, with the University of Michigan confidence survey soon after at 1355 GMT.