Tuesday, July 26, 2011

US Rating Downgrade will Follow in any Case

Previous session overview
The dollar fell sharply in volatile Asian trade Tuesday after U.S. President Barack Obama made clear in a nationwide address there was no deal in sight to end the debt stalemate that threatens to bring an unprecedented ratings downgrade.

The fall was temporarily arrested by a quick spike of some 70 pips against the yen, but traders quickly ruled out any intervention by Japan to arrest the yen's rise, and the dollar resumed its downward trend. 

Speaking of the latest Republican proposal put forward by House Speaker John Boehner, which would raise the debt ceiling in a two-step process, "it doesn't solve the problem," Obama said. 

The euro was the big beneficiary from the dollar selloff, rising to USD1.4501. That was the highest since July 5 and up from USD1.4377 in New York, as the markets putting aside euro-zone debt problems for now. As of 0550 GMT, it was at USD1.4493. 

Against the yen, the dollar fell to JPUY77.88, the latest in a string of four-month lows, be only briefly interrupted by the short-lived surge. As of 0550 GMT, it was at JPY78.07, compared with JPY78.27 in late New York trade Monday. 

The ICE Dollar Index also fell sharply to as low as 73.575 from 74.108, its lowest level since June 8. 

The Australian dollar reached its highest point since early May Tuesday as growing concern about the U.S.'s fiscal position hampered the greenback. The Australian dollar got a further boost as the governor of Australia's central bank, Glenn Stevens, in an afternoon speech said Australians shouldn't be too concerned about slowing Australian household consumption, noting he was optimistic about the country's prospects. At 0600 GMT, the Australian dollar was at USD1.0917, up from USD1.0821 late Monday. Against the Japanese yen, the Australian dollar was at JPY85.23, up from JPY84.91.
Market expectation
Traders say that even a deal on raising the debt ceiling may not end the problems for the dollar, since some analysts believe a rating downgrade will likely follow in any case.

SEK looks set to strengthen against EUR, given the boost from better risk appetite, dealers say. EURSEK should be sold on a break below SEK9.08, dealers say. EURSEK bears will be looking for the cross to fall below SEK9.04 to confirm a downward trend, dealers add.

European stocks are expected to start just a touch higher Tuesday, following the positive session overall in Asia and after Wall Street's losses were not as devastating as expected. 

U.S. debt negotiations are continuing and continue to look strained but investors believe a solution to the impasse between negotiating parties will be found eventually, so the unthinkable a default by the U.S. is averted.