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Dollar may fall as US debt ceiling deadline nears

Fri, 22nd Jul 2011 22:36


By Wanfeng Zhou

NEW YORK, July 22 (Reuters) - The U.S. dollar may fal
l next

week on concern the United States may lose its top-notch credit

rating with politicians nowhere close to reaching an agreement

on lifting the U.S. debt ceiling as an Aug. 2 deadline looms.

Fears of a full-blown euro zone debt crisis have subsided

for now after the announcement of a second bailout for Greece

and the focus is shifting to Washington where efforts to avoid

a U.S. default enter crunch time.

The drawn-out battle has dented risk appetite in recent

weeks and led ratings agencies to warn of a potential

downgrade. Such a move, some fear, could send interest rates

soaring and erode the dollar's reserve currency status.

Dollar investors have so far been complacent as the U.S.

currency rose against the euro and a basket on

Friday. Most investors expect some sort of deal by Aug. 2 to

avoid a default, although some fear that failure to reach a

major deficit cut plan could lead to a credit ratings cut. That

worry is set to grow as time is running out.

'If the markets don't hear anything going into the weekend,

I think the first instinct will be to sell first and ask

questions later,' said Boris Schlossberg, director of currency

research at GFT in New York.

'There's much less cooperation amongst the U.S. legislators

than there is amongst the Europeans. That kind of dichotomy

could begin to hurt the dollar ...'

While efforts to craft a $3 trillion deficit-reduction deal

gained traction on Thursday, the White House and Republicans

have not broken their impasse over higher taxes, which are

opposed by the Republicans, who control the lower house.

The White House initially set a July 22 target for a deal

that would leave enough time to get it through the legislative

process. But it has backed off that timeframe.

'It's brinkmanship and no one's going to blink until they

really have to,' said Mark McCormick, currency strategist at

Brown Brothers Harriman in New York. 'The market would really

like to see a big deal, something along the lines of $3 to $4

trillion that really addresses the structural problems of the

U.S. economy.'





RISK OF DOWNGRADE

Standard & Poor's said on Thursday there is a 50-50 chance

the U.S. AAA credit rating could be cut within three months.

'The potential for the U.S. to lose its triple-A rating is

definitely there,' said Andrew Busch, global currency and

public policy strategist at BMO Capital Markets in Chicago.

'That is going to be problematic for the markets, which would

cause the market probably to sell the U.S. dollar.'

Analysts expect the dollar to weaken especially against the

safe-haven Japanese yen and Swiss franc.

The debt ceiling impasse has also whipsawed 30-year

Treasury bonds lately, as the long-dated debt is most

vulnerable if the country fails to reduce its deficit.

A downgrade to AA will likely hurt Treasuries, though most

fund managers are not thought to be restricted by the

government debt's ratings and thus are unlikely to be forced to

sell the debt.

Thomas Higgins, global macro strategist at Standish Mellon

Asset management, said that ironically, in the event of a U.S.

default, which is highly unlikely, investors may want to be

overweight Treasuries in the short term because of the negative

implications for economic growth. Standish oversees $80 billion

in assets.



SINGING KUMBAYA

The euro last traded down 0.4 percent at $1.4361.

The dollar also rose 0.3 percent to 0.8178 Swiss franc, off a

record low of 0.8034 set on Monday. It also rebounded

from an earlier four-month trough of 78.22 yen to

last trade at 78.43 yen.

'The dollar has remained largely unmoved thus far because

no one wants to be caught with a short position in the event

that Congress starts singing 'kumbaya',' said Karl Schamotta,

senior market strategist at Western Union Business Solutions.

'The markets have already largely discounted a positive

outcome.'

Some analysts are skeptical how much the dollar could

benefit even if politicians make notable progress on a deal.

Alan Ruskin, global head of G10 currency strategy at

Deutsche Bank in New York, said while a rally in the first 24

hours is possible, the dollar could come under renewed pressure

as an increase in global risk appetite encourages investors to

use the dollar as a funding currency.

(Additional reporting by Nick Olivari, Gertrude

Chavez-Dreyfuss and Karen Brettell; Editing by James

Dalgleish)

Keywords: MARKETS FOREX Currency bid prices at 4:11 p.m. EDT (2011 GMT). All data taken from Reuters calculated from the levels in the previous New York session. Last US Close Pct YTD Pct 2010 July 21 Change Change Close ------------------------------------------------------------- Euro/dlr 1.4361 1.4421 -0.42 +7.36 1.3377 Dlr/yen 78.430 78.420 +0.01 -3.35 81.150 Euro/yen 112.66 113.14 -0.42 +3.71 108.63 Dlr/swiss 0.8180 0.8152 +0.34 -12.37 0.9335 Stg/dlr 1.6297 1.6312 -0.09 +4.47 1.5599 Dlr/cad 0.9487 0.9436 +0.54 -4.82 0.9967 Aus/dlr 1.0851 1.0839 +0.11 +6.35 1.0203 Euro/swiss 1.1750 1.1755 -0.04 -5.91 1.2488 Euro/stg 0.8811 0.8839 -0.32 +2.79 0.8572 Nzd/dlr 0.8646 0.8625 +0.24 +10.97 0.7791 Dlr/Norw 5.4147 5.3987 +0.30 -6.99 5.8218 Euro/Norw 7.7792 7.7926 -0.17 -0.13 7.7895 Dlr/Swed 6.3326 6.3020 +0.49 -5.62 6.7098 Euro/Swed 9.0951 9.0910 +0.05 +1.27 8.9809 All spots Tokyo spots Europe spots Volatilities Tokyo Forex market info from BOJ World central bank news Economic Forecasts... Official rates... Forex Diary....... Top events........ Diaries........... Diaries Index........ Press Digests..... Polls on G7 economies.. European markets...... Keywords: MARKETS FOREX

(wanfeng.zhou@thomsonreuters.com; Tel: +1 646 223 6304; Reuters Messaging: wanfeng.zhou.reuters.com@reuters.net)

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