Risk of US default puts dollar under pressure

AP News
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Posted: Jul 27, 2011 3:59 PM
Risk of US default puts dollar under pressure

The dollar recouped some recent losses Wednesday but remained under pressure as investors weigh the risk of a possible U.S. default after Aug. 2 if lawmakers can't agree to raise the debt ceiling.

Analysts say a default could send stocks and the dollar plunging and interest rates soaring, further damaging the weak economic recovery.

On Wednesday, the dollar hit a four-month low against the Japanese yen, a record low against the Swiss franc and a nearly 28-year low versus the Australian dollar. It hovered near a three-year low against the Canadian dollar.

"It's all about wealth preservation and the general abhorrence of sovereign risk problems," said Morgan Stanley currency analyst Ron Leven. "Money's tending to gravitate to countries that don't have as much debt: Canada, Switzerland, Australia, Norway."

But the dollar regained some lost ground and rose against the euro, British pound and the yen. It's still down about 2.5 percent against a group of six major currencies since July 11.

Traders have been selling the dollar as U.S. lawmakers and the White House are in disagreement over how and whether to raise the government's ability to borrow. If they can't strike a deal, investors fear a default and the loss of the top-notch debt rating.

The euro slid to $1.4372 late Wednesday from $1.4518 late Tuesday. UBS analyst Chris Walker said comments from the German finance minister have raised concerns about the difficulty of putting the recently expanded aid plan for Europe's indebted countries into action. Also adding pressure on the euro, credit ratings agency Standard and Poor's on Wednesday Greece's government bonds to the deeper end of junk status and said a new downgrade is likely.

European officials last week signed off on a second round of emergency loans for Greece to cut the risk of default and a possible European banking crisis. They also agreed to expand the powers of a regional bailout fund. Investors had been afraid that the debt crisis would infect Spain and Italy.

The British pound also fell, to $1.6327 from $1.6422.

In other trading Wednesday, the dollar recovered from lows struck earlier in the day. It rose to 78.06 yen from 77.88 yen, recovering from a four-month low of 77.54 earlier in the day. The yen hasn't been this strong since before the Group of Seven major banks intervened to weaken the Japanese currency in the aftermath of the March earthquake and tsunami, which drove safety-seeking traders to invest in the currency.

The dollar rose to 0.8022 Swiss franc from 0.8011, retreating from its recent low of 0.7993 franc.

The dollar, yen and franc are often viewed as safe bets for traders and have tended to gain in times of financial crisis or slower economic growth. But the debt problems in the U.S. have made the dollar less popular than the yen and franc.

The U.S. dollar rose to 94.95 Canadian cents from 94.31 Canadian cents, recovering from Tuesday's three-year low of 94.03 Canadian cents.