Dollar hits five-month low - Fears mount over US debt

Dollar hits five-month low - Fears mount over US debt
By Peter Garnham
Copyright The Financial Times Limited 2009
Published: May 22 2009 10:56 | Last updated: May 22 2009 17:03
http://www.ft.com/cms/s/0/cdecffaa-46b0-11de-923e-00144feabdc0.html


The dollar dropped to its lowest level so far this year as optimism that the worst of the financial crisis may be over stemmed haven demand for the currency.

Analysts said the dollar faced a near-perfect storm as improving risk conditions sparked higher oil prices and a strong rally in emerging markets.

But David Woo, analyst at Barclays Capital, said the most significant issue weighing on the dollar was increased concern about the magnitude of US debt issuance, which led US stocks, bonds and the currency all to fall simultaneously.

“Our medium-term dollar bearish view has been mainly predicated on this concern, which is the ugly combination the US economy faces of a large fiscal deficit, quantitative easing and strong exchange rate,” he said.

“The new reality that policymakers in Washington are facing is that with declining risk aversion, investors are now demanding higher premium for holding the dollar and US assets, especially US government bonds.”

Over the week, the dollar dropped 3.8 per cent to a four-month low of $1.4010 against the euro, fell 0.8 per cent to Y94.25 against the yen and lost 3.2 per cent to SFr1.0863 against the Swiss franc.

But the pound advanced more strongly against the dollar, rising 4.7 per cent to a six-month high of $1.5880 on the week.

This was in spite of Standard & Poor’s lowering its outlook on the triple A rating on UK debt to “negative” from “stable” on Thursday.

The rating agency based its warning on a forecast that net UK government debt risked approaching 100 per cent of national income.

While the pound dropped sharply immediately after the announcement, it quickly reclaimed losses as investors mulled the possibility that US debt could be next to face rating agency scrutiny.

“The dollar has continued to slide as investors conclude the US might be the next major economy to be put on negative credit watch by rating agencies,” said Hans Redeker, analyst at BNP Paribas.

“S&P criteria for putting the UK under negative watch, namely its projection that public debt will reach 100 per cent of GDP in 2013, may also apply for the US.”

Indeed, sterling advanced elsewhere as confidence in the financial sector was boosted by news that the UK government is in discussions to sell stakes in part-nationalised banks.

This, along with better than expected UK house price data, fanned confidence that the economy might be hitting a bottom for the cycle.

Over the week, the pound rose 0.9 per cent to a three-month high of £0.8805 against the euro and gained 3.8 per cent to Y149.65 against the yen.

Increasing optimism also boosted commodity-linked currencies.

Over the week, the Australian dollar climbed 4.3 per cent to $0.7823 against the dollar, the New Zealand dollar rose 5.7 per cent to $0.6195 and the Canadian dollar gained 4.3 per cent to C$1.1275.

Emerging market currencies rallied strongly, with the Turkish lira climbing 1.6 per cent to TL1.5400 against the dollar on the week, the Brazilian real gaining 3.7 per cent to R$2.0330 and the South African rand rising 4.9 per cent to R8.2965.

The Indian rupee surged to a five-month high against the dollar. Over the week the rupee rose 4.8 per cent to Rs46.95 against the dollar.