(Bloomberg) -- The Japanese yen and the Swiss franc strengthened as Standard & Poor's downgrade of the U.S., coupled with a deepening euro-region sovereign debt crisis, lifted demand for the safest assets.
The dollar dropped to a record low against the Swiss franc and fell for a second day versus the yen after S&P lowered the U.S. credit rating one level on Aug. 5. The yen gained versus all but one of 16 major peers as Asian shares slid for a fifth day and European equities dropped for a seventh. Gold jumped to an all-time high, rising to more than $1,700 an ounce. The euro advanced after the European Central Bank started buying Italian and Spanish bonds to curb the region's debt crisis.
"Rising risk aversion has led to more demand for safe- haven currencies, such as the Swiss franc and yen," said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. "That's also helping to offset the negative impact of the U.S. downgrade on the dollar."
The dollar fell as much as 2.5 percent to as low as 74.85 Swiss centimes before trading 0.6 percent weaker at 76.26 centimes as of 7:10 a.m. in New York. The U.S. currency weakened 0.9 percent to 77.68 yen. Against the 17-nation euro, it traded at $1.4263, from $1.4282 at the end of last week. The euro dropped 1 percent to 110.90 yen and declined 0.7 percent to 1.0883 francs.
Implied volatility, a key gauge of option prices that tends to rise in times of uncertainty, for euro-Swiss one-month options climbed to more than 20 percent. That's above the previous high reached in October 2008, one month after the collapse of Lehman Brothers Holdings Inc.
S&P Outlook
S&P kept the outlook on the U.S. rating at "negative" as it became less confident Congress will end tax cuts passed during President George W. Bush's tenure or tackle entitlements. The rating may be cut to AA from AA+ within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based company said on Aug. 5 after markets closed.
Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse that had pushed the Treasury to the edge of default. Moody's and Fitch also said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.
S&P's move "highlights the much less advanced pace of fiscal consolidation in the U.S., relative to Europe and the U.K.," John Normand, the London-based global head of foreign- exchange strategy at JPMorgan Chase & Co., wrote in a report to clients.
Risk Aversion
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, fell for a second day, slipping 0.2 percent to 74.479.
"Much will depend how this risk aversion phase goes on," said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse Group AG in Zurich. "If markets get into a very risk- averse mode, then the dollar could benefit in the short term, but longer term I think you still have a currency in the U.S. with an external deficit, very low interest rates and now even a lower credit rating so it's negative for the U.S. dollar."
The Federal Reserve meets tomorrow on monetary policy. Fed policy makers may address chances of further slowdown when the Federal Open Market Committee releases a statement. Chairman Ben S. Bernanke told Congress on July 14 that central bank officials want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.
G-7 Call
Group of Seven nations sought to head off a collapse in global investor confidence, saying in a joint statement today that they will take every action necessary to stabilize financial markets. Members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary, Japanese Finance Minister Yoshihiko Noda said in Tokyo after a conference call with G-7 representatives.
"There were no concrete measures announced by the G-7, but the conference call itself gave the market a favorable impression that they will try to avoid volatility in the currency market," said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan's largest online currency broker. "Buying of yen against the dollar has calmed down."
'Intervention Risks'
Japan may have spent a record amount intervening to stem the yen's gains on Aug. 4, based on a projection of deposits held by financial institutions at the Bank of Japan. Noda said last week's action was unilateral. A day earlier Switzerland unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to curb its appreciation.
"The dollar was initially weaker against the yen and Swiss franc, but both those losses are being contained somewhat by the heightened intervention risks," said John Horner, a currency strategist at Deutsche Bank AG in Sydney.
The MSCI Asia Pacific Index of regional shares, which last week entered a so-called correction after falling more than 10 percent from its May peak, slumped 2.4 percent. The Stoxx Europe 600 Index fell 1.9 percent after gaining 0.8 percent.
The Australian dollar dropped 1.7 percent to 80.49 yen and declined 0.8 percent to $1.0363. New Zealand's currency sank 2.6 percent to 64.41 yen and 1.6 percent to 82.97 U.S. cents.
ECB Bond Purchases
For risky currencies such as the Australian dollar to fall further, global equity markets will likely need to extend declines, Horner said. "A lot of that's going to depend on how European bond markets react over the next few days."
The euro rose earlier against the greenback after the Frankfurt-based ECB said it welcomed Italy and Spain's efforts to reduce their deficits and will "actively implement" its bond-purchase program.
In a statement issued yesterday in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the ECB called on all euro-area governments to follow through on measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
The ECB bought Italian and Spanish government bonds today, according to six people with knowledge of the transactions. The central bank isn't buying Irish or Portuguese bonds, said one of the people, who asked not to be identified because the deals are confidential. A spokesman for the ECB declined to comment.
Bearish Bets
Policy makers are being forced to step up their response after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. Italian and Spanish 10-year yields reached euro-era records last week.
"The ECB's decision with regard to buying Spanish and Italian debt in the secondary market effectively provides a lender of last resort role," said BNY Mellon's Derrick. "This may be positive for the euro and sterling if you're picking up the pace of reserve diversification."
Traders cut bearish bets on the dollar last week from the highest level in more than two months as concern eased that a political stalemate in Washington on raising the U.S. debt limit would erode the value of the world's reserve currency.
Aggregate wagers against the greenback fell for the first time since the period ended July 1, dropping to 307,321 contracts from 310,222, data from the Commodity Futures Trading Commission in Washington show. Futures traders added to bets the dollar will weaken against the yen, Swiss franc, Canadian dollar, U.K. pound, New Zealand dollar and ruble. Wagers on a drop versus the euro, Australian dollar and Mexican peso were trimmed.
Currency Volatility
Volatility in currency markets rose last week to the highest since March, with the JPMorgan Global FX Volatility Index reaching 12.31 on Aug. 4 before easing to 12.18 a day later.
The committee of bond dealers and investors that advises the U.S. Treasury said the dollar's status as the world's reserve currency "appears to be slipping," in quarterly feedback presented to the government on Aug. 3.
The U.S. currency's portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.
Source: http://www.sfgate.com
The dollar dropped to a record low against the Swiss franc and fell for a second day versus the yen after S&P lowered the U.S. credit rating one level on Aug. 5. The yen gained versus all but one of 16 major peers as Asian shares slid for a fifth day and European equities dropped for a seventh. Gold jumped to an all-time high, rising to more than $1,700 an ounce. The euro advanced after the European Central Bank started buying Italian and Spanish bonds to curb the region's debt crisis.
"Rising risk aversion has led to more demand for safe- haven currencies, such as the Swiss franc and yen," said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. "That's also helping to offset the negative impact of the U.S. downgrade on the dollar."
The dollar fell as much as 2.5 percent to as low as 74.85 Swiss centimes before trading 0.6 percent weaker at 76.26 centimes as of 7:10 a.m. in New York. The U.S. currency weakened 0.9 percent to 77.68 yen. Against the 17-nation euro, it traded at $1.4263, from $1.4282 at the end of last week. The euro dropped 1 percent to 110.90 yen and declined 0.7 percent to 1.0883 francs.
Implied volatility, a key gauge of option prices that tends to rise in times of uncertainty, for euro-Swiss one-month options climbed to more than 20 percent. That's above the previous high reached in October 2008, one month after the collapse of Lehman Brothers Holdings Inc.
S&P Outlook
S&P kept the outlook on the U.S. rating at "negative" as it became less confident Congress will end tax cuts passed during President George W. Bush's tenure or tackle entitlements. The rating may be cut to AA from AA+ within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based company said on Aug. 5 after markets closed.
Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. on Aug. 2, the day President Barack Obama signed a bill that ended a debt-ceiling impasse that had pushed the Treasury to the edge of default. Moody's and Fitch also said downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.
S&P's move "highlights the much less advanced pace of fiscal consolidation in the U.S., relative to Europe and the U.K.," John Normand, the London-based global head of foreign- exchange strategy at JPMorgan Chase & Co., wrote in a report to clients.
Risk Aversion
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, fell for a second day, slipping 0.2 percent to 74.479.
"Much will depend how this risk aversion phase goes on," said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse Group AG in Zurich. "If markets get into a very risk- averse mode, then the dollar could benefit in the short term, but longer term I think you still have a currency in the U.S. with an external deficit, very low interest rates and now even a lower credit rating so it's negative for the U.S. dollar."
The Federal Reserve meets tomorrow on monetary policy. Fed policy makers may address chances of further slowdown when the Federal Open Market Committee releases a statement. Chairman Ben S. Bernanke told Congress on July 14 that central bank officials want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.
G-7 Call
Group of Seven nations sought to head off a collapse in global investor confidence, saying in a joint statement today that they will take every action necessary to stabilize financial markets. Members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary, Japanese Finance Minister Yoshihiko Noda said in Tokyo after a conference call with G-7 representatives.
"There were no concrete measures announced by the G-7, but the conference call itself gave the market a favorable impression that they will try to avoid volatility in the currency market," said Daisaku Ueno, president of Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan's largest online currency broker. "Buying of yen against the dollar has calmed down."
'Intervention Risks'
Japan may have spent a record amount intervening to stem the yen's gains on Aug. 4, based on a projection of deposits held by financial institutions at the Bank of Japan. Noda said last week's action was unilateral. A day earlier Switzerland unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets to curb its appreciation.
"The dollar was initially weaker against the yen and Swiss franc, but both those losses are being contained somewhat by the heightened intervention risks," said John Horner, a currency strategist at Deutsche Bank AG in Sydney.
The MSCI Asia Pacific Index of regional shares, which last week entered a so-called correction after falling more than 10 percent from its May peak, slumped 2.4 percent. The Stoxx Europe 600 Index fell 1.9 percent after gaining 0.8 percent.
The Australian dollar dropped 1.7 percent to 80.49 yen and declined 0.8 percent to $1.0363. New Zealand's currency sank 2.6 percent to 64.41 yen and 1.6 percent to 82.97 U.S. cents.
ECB Bond Purchases
For risky currencies such as the Australian dollar to fall further, global equity markets will likely need to extend declines, Horner said. "A lot of that's going to depend on how European bond markets react over the next few days."
The euro rose earlier against the greenback after the Frankfurt-based ECB said it welcomed Italy and Spain's efforts to reduce their deficits and will "actively implement" its bond-purchase program.
In a statement issued yesterday in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the ECB called on all euro-area governments to follow through on measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
The ECB bought Italian and Spanish government bonds today, according to six people with knowledge of the transactions. The central bank isn't buying Irish or Portuguese bonds, said one of the people, who asked not to be identified because the deals are confidential. A spokesman for the ECB declined to comment.
Bearish Bets
Policy makers are being forced to step up their response after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. Italian and Spanish 10-year yields reached euro-era records last week.
"The ECB's decision with regard to buying Spanish and Italian debt in the secondary market effectively provides a lender of last resort role," said BNY Mellon's Derrick. "This may be positive for the euro and sterling if you're picking up the pace of reserve diversification."
Traders cut bearish bets on the dollar last week from the highest level in more than two months as concern eased that a political stalemate in Washington on raising the U.S. debt limit would erode the value of the world's reserve currency.
Aggregate wagers against the greenback fell for the first time since the period ended July 1, dropping to 307,321 contracts from 310,222, data from the Commodity Futures Trading Commission in Washington show. Futures traders added to bets the dollar will weaken against the yen, Swiss franc, Canadian dollar, U.K. pound, New Zealand dollar and ruble. Wagers on a drop versus the euro, Australian dollar and Mexican peso were trimmed.
Currency Volatility
Volatility in currency markets rose last week to the highest since March, with the JPMorgan Global FX Volatility Index reaching 12.31 on Aug. 4 before easing to 12.18 a day later.
The committee of bond dealers and investors that advises the U.S. Treasury said the dollar's status as the world's reserve currency "appears to be slipping," in quarterly feedback presented to the government on Aug. 3.
The U.S. currency's portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.
Source: http://www.sfgate.com
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