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US$ Falls Versus JPY, CHF on US Debt Downgrade

The U.S. dollar traded in a mixed direction overnight, gaining against the majority of its higher-yielding counterparts, but falling against the Swiss Franc and Japanese yen.  Indeed, the yen and franc have enjoyed the majority of safe-haven flows as Standard & Poor’s downgraded U.S. debt and euro-region debt crisis deepened.  Late Friday S&P cut its U.S. debt rating from AAA to AA+.  S&P kept the outlook on the rating at “negative” as it became less confident Congress will end tax cuts passed during President George W. Bush’s tenure or tackle entitlements.  The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the company said on Friday after markets closed.  Moody’s Investors Service and Fitch Ratings affirmed their AAA credit rating for the U.S. on August 2^nd, the day President Barack Obama signed a bill than ended a debt-ceiling impasse that pushed the Treasury to the edge of default.  Gold, often traded as a hedge against economic uncertainty, jumped to an all-time and is currently trading above $1,700 an ounce.  However, the commodity-based currencies such as the New Zealand dollar remain under pressure as other commodities like oil have fallen steeply.  The Federal Reserve meets tomorrow on monetary policy and policy makers may address chances of further slowdown when the FOMC releases a statement.  There is no major economic data slated for Wednesday and only weekly jobless claims on Thursday.  Retail Sales and consumer sentiment will round out the weekly economic docket on Friday. 

The Euro retreated against the U.S. dollar on widespread global risk aversion and as European equities fell for the seventh straight day.  In addition, Asian stocks ticked lower for a fifth day and U.S. futures point to a significantly lower open.  The Euro pared its declines somewhat after the European Central bank said it welcomed Italy and Spain’s efforts to reduce their deficits and will “actively implement” its bond-purchasing program.  The ECB has reportedly bought Italian and Spanish government bonds today, after bonds slid to a record last week. 

The Japanese yen strengthened against all of its counterparts, surging nearly 1.0% against the U.S. dollar as the currency continues to be a popular choice for investors seeking a relatively safe investment.  The yen’s gains were tempered on the possibility of another round of intervention.  Group of Seven nations sought to head off a collapse in global investor confidence, saying in a joint statement today that they will take every action necessary to stabilize financial markets.  Members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary, Japanese Finance Minister Yoshihiko Noda said in Tokyo after a conference call with G-7 representatives.  

The British pound has maintained its tight range against the U.S. dollar as poor British economic data and a downgrade of the U.S.’s debt rating pulled the pair in opposing directions.  An index of sentiment toward U.K. employment prospects dropped 3 points from June to minus 53 in July.  The print comes on a week after data showed the U.K. economy grew just 0.2% in the second quarter, while manufacturing shrank in July. 

US$ Falls Versus Majors, Rallies Against Swiss Franc

The U.S. dollar traded in a mixed direction overnight, falling versus most of its counterparts but rallying against the Swiss franc.  The greenback has retraced some of its recent gains from the first half of the week as Moody’s Investor Services said the U.S. is still at risk of losing its top credit rating, even after President Barack Obama signed into a law a bill that would reduce the national debt by at least 2.4 trillion dollars over the next ten years.  The U.S., rated Aaa since 1917, was placed on a negative outlook.  However, Moodys did confirm the rating on Monday.  The U.S. dollar lost the most versus the Swedish krona as gross domestic product grew more than estimated, sparking speculation the country’s economic growth would warrant further rate increases.  The U.S. economic calendar showed companies in the U.S. added 114,000 workers to payrolls in July, according to the ADP Employer Services.  The increased followed a revised 145,000 gain in the month prior. 

The Swiss franc fell against all of its major peers after the central bank unexpectedly cut interest rates to weaken the currency after it strengthened to records versus the U.S. dollar and the Euro and threatened the nation’s economic recovery.  The franc dropped the most in more than two years against the Euro after touching a record high as the Swiss National Bank said it will increase the supply of the currency to money markets.  The Organization for Economic Cooperation and Development’s measure of purchasing power parity suggests the franc is 49.5% overvalued against the dollar and 42% overvalued versus the Euro.

The Euro gained versus the dollar, paring its losses from earlier this week even as European stocks continued their decline.  Higher-yielding currencies have gained versus the U.S. dollar overnight amid speculation that the world’s largest economy may still lose its Aaa credit rating.  Meanwhile, the economic docket showed the European retail sales declined the most in more than a year in May, as consumers from Germany to Ireland and Spain cut spending.  Sales in the 17-nation euro region slipped 1.1% from April, when they rose 0.7%, the European Union’s statistics office said today.  The print represents the biggest decline since April 2010.  The poor data solidified projections that the European Central Bank will leave rates unchanged at 1.5% at the conclusions of their meeting tomorrow. 

The Japanese yen remains near record highs against the U.S. dollar as investors seeking a safe-haven investment continue to pour funds into the currency.  Japanese Finance Minister continued to attempt to “talk down” the currency and said the nation would aim for “maximum effect” in any intervention to weaken the yen.  Japanese policy makers have signaled this week increasing concern about the yen, which is nearing a post-World War II high. 

Like the Euro, the British pound also bucked the recent trend, gaining against the U.S. dollar even as global equities continue to push lower.  The Sterling found support as U.K. services growth unexpectedly accelerated in July to the fastest pace in four months, led by demand at business services and technology companies.  The gauge based on a survey of services companies rose to 55.4 from 53.9 in June, Markit Economics and Chartered Institute of Purchasing and Supply reported.  A reading above 50 indicates expansion.  The report comes two days after a separate report showed manufacturing shrank in July.  Nevertheless, the Bank of England is widely expected to keep interest rates at a record low tomorrow.   

US$ Gains Versus Japanese Yen on Debt Deal

The U.S. dollar gained against the Japanese yen, but remained relatively unchanged versus most of its counterparts, even after U.S. President Barack Obama and congressional leaders agreed on a plan to prevent a default.  Obama said from the White House late yesterday that leaders of both parties in the U.S. House and Senate approved an agreement to raise the nation’s debt ceiling by $2.1 trillion and cut the federal deficit by as much as $2.5 trillion over a decade.  Both Senate Majority Leader Harry and Minority Leader Mitch McConnell took to the Senate floor to endorse the accord.  News of the deal sparked demand for higher-yielding assets and Asian and European stocks rallied.  U.S. stock futures foreshadow American shares will open over 1.0% higher this morning.  However, the greenback fell to a fresh all-time low versus the New Zealand dollar on improved prospects for the island nation’s exports after a report showed faster-than-estimated manufacturing in China.  Later this morning, the Institute for Supply Management’s index for U.S. manufacturing is expected to fall to 54.5 last month from 55.3 in June.  Figures greater than 50 signal expansion.

The Euro rallied against many of its counterparts and found modest support versus the U.S. dollar as higher-yielding assets, including the common currency, were boosted by an apparent compromise that would raise the U.S. debt ceiling.  The Euro gained as Asian and European equities gained about 1.0% in overnight trading.  However, the Euro still remains under pressure against some of its rivals on concern the debt crisis triggered by Greece is spreading to bigger nations, threatening the region’s economic recovery.  Moody’s Investor Service said late last week that it is reviewing Spain’s Aa2 credit rating that a cut would probably be “limited to one notch.”  Later this week, the European Central Bank will probably leave its benchmark interest rate unchanged at 1.5%, according to 54 economists polled by Bloomerg News. 

The safe-haven Japanese yen dropped against all of its major peers as news of a U.S. debt deal sent global equities higher, sapping demand for the Japanese currency.  The yen also weakened amid speculation the government and central bank will take steps to halt gains in the yen that threaten the nation’s export-led economy.  Finance Minister Yoshihiko Noda said today that he’s watching currency markets closely and that recent movements haven’t reflected Japan’s economic fundamentals. 

The British pound fell against the U.S. dollar as a slew of poor economic data placed downward pressure on the currency.  A gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply shrank 49.1 in July, the lowest since June 2009.  The print failed to meet the median forecast of 51.  The Confederation of British Industry cut its growth forecast for the U.K. economy after gross domestic product barely grew in the second quarter.  The U.K. will grow 1.3% this year, compared with an estimate of 1.7% in May, the country’s biggest employers’ group said in a quarterly forecast released in London today.