Debt Worries Hit Dollar, Euro
Asian currencies reached new highs against the dollar as investors increasingly expected the U.S. to lose its triple-A credit rating, but the greenback gained against the euro following a reminder that the euro zone's debt woes are far from over.
The U.S. currency fell to ¥77.78, its lowest since the post-World War II low of ¥76.25 reached in March. Japan Finance Minister Yoshihiko Noda reiterated that he will continue to closely monitor the market. For a second straight day, central banks in Thailand and South Korea intervened to keep their currencies from rising too quickly and damaging their export-dependent economies.
The euro, though, traded lower, falling to $1.4468 from $1.4511 late Tuesday in New York after German Finance Minister Wolfgang Schäuble said Berlin opposes giving the euro zone's bailout fund carte blanche to buy government bonds in the secondary market. That option had been assumed when euro-zone policy makers hammered out Greece's new aid package last week. It was seen as crucial to their efforts to stop the crisis from spreading to other indebted nations, such as Spain and Italy.
Paul Robson, currency strategist at Royal Bank of Scotland, said Mr. Schäuble's remarks are a timely reminder that last week's deal is no panacea even though the required political will had been exhibited. "It was a useful step, but there is still a lot to be done," he said.
Reflecting wider concerns about the debt situation in the euro zone, prices of default insurance on Italian and Spanish government debt were also higher. But while Mr. Schäuble's comment put the euro in focus, the deadline on U.S. debt-ceiling talks remains a more immediate worry. Lawmakers in the U.S. must agree to raise the threshold by Aug. 2, but political brinkmanship appears to be governing the debate.
Many traders still predict a last-minute breakthrough, but markets remain nervous. Mr. Robson at RBS said he would advise selling the dollar against the yen and Swiss franc.
Wednesday's gains by Asian currencies extended a months-long trend of investors moving out of the dollar and euro, which are burdened by seemingly intractable fiscal problems.
In the past, the threat of sovereign defaults in the U.S. and Europe might have scared investors away from emerging markets, but investors now appear willing to buy into the fundamentals of such economies as Singapore and Malaysia, even though emerging-market assets have historically been seen as risky.
"Now more than ever, Asia is seen as a region where there are strong fundamentals," said Thomas Harr, head of Asian foreign-exchange strategy at Standard Chartered Bank.
"These flows coming into Asia are safe-haven flows; they are increasing even though you could say that risk appetite is not very strong," he said.
The U.S. dollar hit an all-time low against the Singapore dollar, breaching S$1.2000 to hit S$1.1992 before rebounding gently. Late Tuesday in New York, it was at S$1.2030. The Malaysian ringgit was at its strongest in 14 years, as the dollar sank to 2.9350 ringgit from 2.9524 ringgit late Tuesday.
Dollar selling pushed the Indonesian rupiah to a seven-year high. A dealer said Bank Indonesia may be checking prices in the market but there was no evidence of intervention.
Many market observers expect the U.S. to be hit by a ratings downgrade even if the White House and Congress reach an agreement to raise the federal borrowing limits by Tuesday, a deal which for the moment remains elusive. Wednesday's dollar losses are in part the result of trading in anticipation of that expected downgrade, Mr. Harr said.
The threat of central-bank intervention tempered investor enthusiasm in some markets. "With the central bank present, punters are pushing the baht up with caution," said a Bangkok dealer.
The Australian dollar, already riding high as a result of the U.S.'s debt woes, hit a fresh 30-year high at $1.1062 after a stronger-than-expected reading on consumer inflation. The Aussie dollar was trading around $1.1020 late Wednesday morning in New York, up from $1.0957 late Tuesday.
Despite the currency's rise, Australian Treasurer Wayne Swan ruled out the possibility of direct government intervention to ease pressure on the resource-rich nation's currency.
"I believe in a market mechanism for the exchange rate," Mr. Swan said Wednesday in an interview. "It serves us very well over a long period of time and I don't see any reason why we would depart from it."
Mr. Swan's remarks followed complaints by the Australian Industry Group that the strong currency is hurting tourism and manufacturers.
The dollar was at ¥77.93 late Wednesday morning in New York, compared with ¥77.89 late on Tuesday.