LONDON, July 29 (news agencies and on-line reports): The dollar fell to a four-month low against the yen and hovered near record lows versus the Swiss franc on Friday.
The euro also came under fresh pressure as investors sought safe-haven currencies on mounting sovereign debt problems.
As worries over debts move from Europe to the US, the markets have reacted with some panic.
Economic problems in the US could be far more serious for the world economy than anything that could happen in Greece.
But some economists have suggested that an essentially political drama is being mistaken for an economic crisis.
The US government needs the permission of its Congress to raise the ceiling on the amount of money it can borrow.
If Congress doesn’t grant it -- currently the deadline is August 02 -- the government will hit the limit and may have difficulties in paying its bills.
But there is a wider economic problem behind the stalemate.
The US -- like Greece -- is spending far more than it earns through taxes.
The annual budget deficit has reached $1.5 trillion (£920bn) this year -- just over 10per cent of GDP -- and the country has amassed a national debt of around $14.3 trillion.
President Barack Obama and the Republican controlled House of Representatives both agree the US needs to borrow less in the future -- they just disagree on how.
It’s that argument which is delaying progress on lifting the current borrowing limit.
As a result, ratings agencies have suggested that they may downgrade US debt from its benchmark top-rated AAA status — unless the two sides agree on radical action to lift the limit and cut the deficit.
The immediate worry for investors is that, if no deal is agreed by August 02, the US may find itself at risk of a so-called technical default.
“The interests of voters and the interests of the markets are completely at odds,” says Dr Pippa Malmgren from Principalis Asset Management.
Some members of Congress were elected promising not to allow the government to run a deficit.
“The market keeps being surprised when it shouldn’t be. You will win votes if you shut the government down,” she says.
“The 2 August deadline is not an absolute deadline, because tax revenues are pretty good so far,” said James Knightley from ING.
If it does run out of money the government may stop paying wages and social security checks — a so-called ‘shut down’.
Government last shut down under Bill Clinton in 1995 when non-essential government services stopped after similar failed negotiations over the budget.
That would hurt the fragile economic recovery — but many economists find it hard to believe the US would ever default and fail to pay its debts.
“I think the risk of that is almost zero,” says Josh Feinman, global chief economist for DB Advisors.
“They’ll keep paying the bond holders but they’ll stop paying someone else.” he added.
Not everyone agrees with Mr Feinman though.
The US needs to re-finance $1.7 trillion, or 12per cent of its total debt this year - that would be hard to do if it can’t borrow fresh funds.
Fidelity, one of the largest private sector holders of US bonds, say they have been preparing for a possible default.
US authorities appeared as far away as ever from reaching a cross-party compromise to raise the debt ceiling while Moody’s said it may cut Spain’s credit rating, fuelling fears about the euro zone’s debt problems.
This is likely to keep growth-linked currencies, including the Australian and New Zealand dollars subdued.
Urgent efforts to avoid an unprecedented US default hit another snag when conservative rebel Republican lawmakers refused to back a deficit reduction plan proposed by their own leaders, who put off a vote scheduled for Thursday night.
The dollar was down 0.2 per cent against the yen at 77.56 yen, having fallen to a four-month low of 77.448 on trading platform EBS.
Japanese Finance Minister Yoshihiko Noda issued a strong warning against the yen’s strength, saying he would carefully consider how long Tokyo could ignore current exchange-rate moves without acting.
“These sovereign debt problems are leading to a decent demand for safe-haven currencies like the yen and the Swiss franc,” said Roberto Mialich, FX strategist at Unicredit.
“How the dollar behaves in the near term will depend a lot on how the credit rating agencies react and whether the US rating is cut.”
Analysts say that even if a last-minute deal to lift the debt limit is struck before the August 02 deadline, a downgrade of the US rating appears likely without a comprehensive plan to cut the deficit.
A downgrade would raise US borrowing costs, hurting an already weak economy, and rattle investors.
Many traders expect a sharp fall in the dollar would trigger heavy selling by Japanese margin traders who hold near-record high long dollar positions, aggravating its decline.
Debt problems also hit the euro, in a reminder that risks of contagion from the euro zone’s sovereign debt crisis was far from gone ever after the bloc’s second rescue package for Greece.
Spanish and Italian bond yields rose while the euro was last down 0.4 per cent at $1.4275. It got some support from a Greek finance ministry official who said China could provide loans to Greece to fund government bond buy-backs.
With investors less willing to take on risk due to the euro zone and U.S. debt problems, the recently outperforming Australian and New Zealand dollars fell prey to profit-taking.
Both currencies, which this week hit multi-year highs, hovered near session lows with the Aussie trading down at $1.0940 and the kiwi 0.4 per cent lower at $0.8671.
In New York, stock index futures fell on Friday after lawmakers in Washington delayed a vote on a Republican proposal to raise the US government’s debt limit.
US stocks, after rising earlier, fell for a fourth day. The Standard & Poor’s 500 dropped 0.3 per cent to 1,300.67, its lowest level for the month. The Dow slipped 62.44 points, or 0.5 per cent, to 12,240.11.
Treasuries rose, pushing 10-year yields to a one-week low, on concern the deadlock will damage the economy. Yields on 10-year notes dropped four basis points, or 0.04 percentage point, to 2.91 per cent at 6:59 a.m. in New York.
The US Commerce Department reported that the US economy grew at an annualised rate of 1.3 per cent in the second quarter. Economists had forecast growth of 1.8 per cent.
And in a surprise move, first-quarter growth was revised down sharply from 1.9 per cent to 0.4 per cent.
There is also much uncertainty at the moment as to how the current row about the US debt crisis will affect its economic recovery.
Economists had expected steady growth in the second quarter, now that supply constraints from Japan after the earthquake and tsunami are easing.
The main reason for the lower-than-expected second-quarter figure was that consumer spending virtually ground to a halt, growing by just 0.1 per cent, compared with 2.1 per cent growth in the first quarter.
Compared with the previous quarter, the economy grew 0.3 per cent.
The large downward revision to the first quarter’s growth figure was made as a result of lower capital investment and higher imports than first thought, and adjusting how seasonal factors are taken into account.
In addition, growth for the fourth quarter of 2010 was revised down from 3.1 per cent to 2.3 per cent, indicating that the economy had already started slowing before the end of last year.
Source: www.thefinancialexpress-bd.com
The euro also came under fresh pressure as investors sought safe-haven currencies on mounting sovereign debt problems.
As worries over debts move from Europe to the US, the markets have reacted with some panic.
Economic problems in the US could be far more serious for the world economy than anything that could happen in Greece.
But some economists have suggested that an essentially political drama is being mistaken for an economic crisis.
The US government needs the permission of its Congress to raise the ceiling on the amount of money it can borrow.
If Congress doesn’t grant it -- currently the deadline is August 02 -- the government will hit the limit and may have difficulties in paying its bills.
But there is a wider economic problem behind the stalemate.
The US -- like Greece -- is spending far more than it earns through taxes.
The annual budget deficit has reached $1.5 trillion (£920bn) this year -- just over 10per cent of GDP -- and the country has amassed a national debt of around $14.3 trillion.
President Barack Obama and the Republican controlled House of Representatives both agree the US needs to borrow less in the future -- they just disagree on how.
It’s that argument which is delaying progress on lifting the current borrowing limit.
As a result, ratings agencies have suggested that they may downgrade US debt from its benchmark top-rated AAA status — unless the two sides agree on radical action to lift the limit and cut the deficit.
The immediate worry for investors is that, if no deal is agreed by August 02, the US may find itself at risk of a so-called technical default.
“The interests of voters and the interests of the markets are completely at odds,” says Dr Pippa Malmgren from Principalis Asset Management.
Some members of Congress were elected promising not to allow the government to run a deficit.
“The market keeps being surprised when it shouldn’t be. You will win votes if you shut the government down,” she says.
“The 2 August deadline is not an absolute deadline, because tax revenues are pretty good so far,” said James Knightley from ING.
If it does run out of money the government may stop paying wages and social security checks — a so-called ‘shut down’.
Government last shut down under Bill Clinton in 1995 when non-essential government services stopped after similar failed negotiations over the budget.
That would hurt the fragile economic recovery — but many economists find it hard to believe the US would ever default and fail to pay its debts.
“I think the risk of that is almost zero,” says Josh Feinman, global chief economist for DB Advisors.
“They’ll keep paying the bond holders but they’ll stop paying someone else.” he added.
Not everyone agrees with Mr Feinman though.
The US needs to re-finance $1.7 trillion, or 12per cent of its total debt this year - that would be hard to do if it can’t borrow fresh funds.
Fidelity, one of the largest private sector holders of US bonds, say they have been preparing for a possible default.
US authorities appeared as far away as ever from reaching a cross-party compromise to raise the debt ceiling while Moody’s said it may cut Spain’s credit rating, fuelling fears about the euro zone’s debt problems.
This is likely to keep growth-linked currencies, including the Australian and New Zealand dollars subdued.
Urgent efforts to avoid an unprecedented US default hit another snag when conservative rebel Republican lawmakers refused to back a deficit reduction plan proposed by their own leaders, who put off a vote scheduled for Thursday night.
The dollar was down 0.2 per cent against the yen at 77.56 yen, having fallen to a four-month low of 77.448 on trading platform EBS.
Japanese Finance Minister Yoshihiko Noda issued a strong warning against the yen’s strength, saying he would carefully consider how long Tokyo could ignore current exchange-rate moves without acting.
“These sovereign debt problems are leading to a decent demand for safe-haven currencies like the yen and the Swiss franc,” said Roberto Mialich, FX strategist at Unicredit.
“How the dollar behaves in the near term will depend a lot on how the credit rating agencies react and whether the US rating is cut.”
Analysts say that even if a last-minute deal to lift the debt limit is struck before the August 02 deadline, a downgrade of the US rating appears likely without a comprehensive plan to cut the deficit.
A downgrade would raise US borrowing costs, hurting an already weak economy, and rattle investors.
Many traders expect a sharp fall in the dollar would trigger heavy selling by Japanese margin traders who hold near-record high long dollar positions, aggravating its decline.
Debt problems also hit the euro, in a reminder that risks of contagion from the euro zone’s sovereign debt crisis was far from gone ever after the bloc’s second rescue package for Greece.
Spanish and Italian bond yields rose while the euro was last down 0.4 per cent at $1.4275. It got some support from a Greek finance ministry official who said China could provide loans to Greece to fund government bond buy-backs.
With investors less willing to take on risk due to the euro zone and U.S. debt problems, the recently outperforming Australian and New Zealand dollars fell prey to profit-taking.
Both currencies, which this week hit multi-year highs, hovered near session lows with the Aussie trading down at $1.0940 and the kiwi 0.4 per cent lower at $0.8671.
In New York, stock index futures fell on Friday after lawmakers in Washington delayed a vote on a Republican proposal to raise the US government’s debt limit.
US stocks, after rising earlier, fell for a fourth day. The Standard & Poor’s 500 dropped 0.3 per cent to 1,300.67, its lowest level for the month. The Dow slipped 62.44 points, or 0.5 per cent, to 12,240.11.
Treasuries rose, pushing 10-year yields to a one-week low, on concern the deadlock will damage the economy. Yields on 10-year notes dropped four basis points, or 0.04 percentage point, to 2.91 per cent at 6:59 a.m. in New York.
The US Commerce Department reported that the US economy grew at an annualised rate of 1.3 per cent in the second quarter. Economists had forecast growth of 1.8 per cent.
And in a surprise move, first-quarter growth was revised down sharply from 1.9 per cent to 0.4 per cent.
There is also much uncertainty at the moment as to how the current row about the US debt crisis will affect its economic recovery.
Economists had expected steady growth in the second quarter, now that supply constraints from Japan after the earthquake and tsunami are easing.
The main reason for the lower-than-expected second-quarter figure was that consumer spending virtually ground to a halt, growing by just 0.1 per cent, compared with 2.1 per cent growth in the first quarter.
Compared with the previous quarter, the economy grew 0.3 per cent.
The large downward revision to the first quarter’s growth figure was made as a result of lower capital investment and higher imports than first thought, and adjusting how seasonal factors are taken into account.
In addition, growth for the fourth quarter of 2010 was revised down from 3.1 per cent to 2.3 per cent, indicating that the economy had already started slowing before the end of last year.
Source: www.thefinancialexpress-bd.com
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