Dollar succumbs to weight of debt, loose Fed policy

The U.S. dollar tumbled for the third straight day on Thursday, as super-low interest rates and the crushing weight of a massive budget deficit pushed the greenback closer to an all-time low.

The dollar's slide accelerated days after Standard & Poor's sparked fears of a downgrade to AAA-rated U.S. debt by labeling its outlook 'negative,' while investors from central banks to fund managers opted for anything but the U.S. currency.

Traders fretting over the Federal Reserve's controversial zero-interest-rate policy found more to worry about with a renewed run in weak economic data on jobs and regional manufacturing.

As long as the economy remains sluggish, it will be difficult for the Fed to raise rates or for Washington to get serious about dealing with the burgeoning national debt.

"If you look at all these big picture things, there's no reason to buy dollars right now," said Ronald Simpson, director of currency research at Action Economics in Tampa, Florida.

The U.S. dollar index, which tracks the greenback versus a basket of currencies, fell 0.6 percent to 73.952 .DXY, having slipped to 73.735, the lowest since August 2008.

The chart outlook for the greenback looked dire after it tumbled through a 74.17 trough hit in November 2009, a move that may spark a run toward the 70.698 all-time low hit in March 2008.

Expectations the Fed will keep benchmark U.S. interest rates near zero for the foreseeable future even as other major central banks have begun raising rates or are about to tighten have pressured the dollar in recent weeks.

Adding to the dollar's woes was a threat by Standard & Poor's on Monday to cut the United States' prized AAA credit rating.

"In the ugly dog currency competition the dollar is looking like the really ugly dog. The euro zone at least looks to be doing something about their debt problems," said a London-based head of FX sales.

The euro climbed to a 16-month high against the dollar near $1.4650, partly helped by M&A-related demand and an increase in risk appetite. The euro last traded at $1.4585, up 0.4 percent.

Analysts said the euro looked on course for a move toward $1.50 if the current momentum continues despite the possibility of a Greek debt restructuring.

Asian Central Banks

The euro has vaulted from $1.4155 hit on Monday and analysts said that few in the market were brave enough to counter insatiable euro demand from Asian sovereigns, which have been seen swooping in to buy the currency whenever it sells off.

Asian authorities have increasingly had to intervene to buy dollars to limit gains in their currencies and then recycle dollar proceeds into the euro, Australian dollar and other currencies.

This has helped the euro to brush off ongoing worries about the euro zone crisis, underscored this week by speculation that Greece may have to restructure its debt.

Support from China has also helped investors shrug off the euro zone's debt woes. A senior Chinese official said on Thursday Beijing stands ready to commit more money to help stabilize the euro zone by buying more bonds after investing billions of euros in the debt of Portugal and Greece.

The Australian dollar soared to a post-float high against the U.S. currency while the Canadian currency pushed up to its strongest since late 2007, though traders warned the moves could reverse as investors take profit on short dollar positions before the long Easter weekend.

Broad dollar weakness pushed the Swiss franc to an all-time high of 0.8782.

Against the yen, the dollar lost 0.8 percent to 81.80 yen, hitting a session low after an index of business conditions in the U.S. mid-Atlantic region came in well below expectations and at its lowest since November 2010.

[Source: By Wanfeng Zhou, Reuters, New York, 21Apr11]

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