Watchman Newsletter

Dollar in full retreat, NZD storms 30-year peak

Reuters (Link) - Wayne Cole (July 13, 2011)

The U.S. dollar was on the run in Asia on Thursday after a ratings warning from Moody�s and a hint of further policy easing from the Federal Reserve unleashed a wave of panic selling, much to the relief of the hard-pressed euro.

The New Zealand dollar was a stand out performer, soaring to 30-year highs after data showed the economy grew far faster than expected in the first quarter.

The kiwi flew to $0.8491, a rise of 3.7 percent in just two sessions, as the upbeat news revived the chance of a rate hike before year-end.

That stood in stark contrast to the United States, where Fed Chairman Ben Bernanke had canvassed the idea of further quantitative easing should the economy stall.

�Three months ago all the focus was on the exit from unconventional policy; now Bernanke mentions the conditional possibility of QE3,� said Paul Meggyesi at JPMorgan. �This is unambiguously bad for the dollar and good for risk.�

Investors seemed to agree, sending commodities and gold higher and lifting growth-leveraged currencies like the Australian dollar.

The U.S. dollar slid to a fresh record low against the Swiss franc around 0.8089 francs, while the euro leaped to $1.4253 having been as low as $1.3984. The dollar also deflated to 78.83 yen with only talk of semi-official bids preventing a break of major support around 78.40/50.

Against a basket of currencies, the dollar was down at 74.773 .DXY, having tumbled for a high of 76.053.

In a double whammy for the U.S. currency, Moody�s warned the country could lose its top-notch credit rating if lawmakers fail to increase the country�s debt ceiling.

In a statement, Moody�s said it sees a �rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations.�

The market has always assumed the specter of default would force the White House and Republicans to reach a last minute deal, but the talks are not going well.

President Barack Obama abruptly ended a tense budget meeting on Wednesday by walking out of the room, a Republican aide familiar with the talks said.

�In our view, the chance of the US defaulting briefly if the political process goes off track is a risk that investors should not ignore,� said Mike Schumacher, a strategist at UBS.

He noted that, according to, the probability of Congress approving an increase in the U.S. debt ceiling by the end of July was only 40 percent and recommend buying 10-year bunds against Treasuries.

The latest U.S. debt woes were a timely diversion for the euro given Fitch had just downgraded Greece deeper into junk territory, citing the absence of a new and fully funded financing program.

Italy faces a tough test later on Thursday when it sells up to 5 billion euros of new debt, with dealers expecting it will have to pay high yields to attract demand.

And Greek Prime Minister George Papandreou said the euro zone and International Monetary Fund must quickly approve a second bailout for his country to avoid its economic reform plans collapsing.

Asia seemed an oasis of calm in comparison, thanks in large part to the continued strength of China where data on growth, industrial output and retail sales had all beaten expectations.

That was one reason the Australian dollar again defied bears by rallying to $1.0780, a marked turnaround from a $1.0521 trough touched early in the week. �

America ~ Economic Crisis ~ Europe