Dollar up, euro down on debt fears, stress tests

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Dollar up, euro down on debt fears, stress tests

Post by Shirley on Mon Jul 18, 2011 8:56 am

July 18, 2011, 8:27 a.m. EDT

Dollar up, euro down on debt fears, stress tests

Risk aversion propels Swiss franc to new highs in Asian trade

By Virginia Harrison, MarketWatch

FRANKFURT (MarketWatch) — The U.S. dollar and Japanese yen gained versus most major rivals, and investors sold the euro and dumped equities and other assets, after a poorly received round of European-bank stress tests and worries about government-debt problems on both sides of the Atlantic.

The dollar index /quotes/zigman/1652083 DXY +0.60% , which tracks the U.S. unit’s performance against a basket of six currencies, traded at 75.595, against 75.148 late Friday. Read “How high can Japan’s yen go?”

After a run of safe-haven buying, the euro /quotes/zigman/4867933/sampled EURUSD -0.42% traded at $1.4036, down from $1.4146 in North American trade late Friday.

The euro rose 0.3% versus the Swiss franc to trade at 1.1479 francs, but only after touching a record low versus the safe-haven franc above 1.1400 francs during Asian trade, according to FactSet Research data.

The stress tests on Friday were derided by many analysts as insufficiently rigorous. The European Banking Authority’s tests showed that eight banks failed the tests with a combined capital shortfall of just 2.5 billion euros ($3.5 billion). Read more: “Bank stress tests weren’t that testing.”

Many analysts said the assumptions behind the test were too benign, particularly in light of renewed pressure on peripheral sovereign debt in the euro zone. The tests made no provision for a default on Greek debt, an event economists see as increasingly likely.

Meanwhile, a continued disagreement between Germany and the European Central Bank over Berlin’s calls for private-sector bondholders to share in the costs of a new Greek bailout plan put further pressure on peripheral government bonds and undercut the euro, strategists said. Read more: “Euro leaders in countdown to crucial summit.”
`Policy paralysis’

“In the meantime, while the current policy paralysis continues, investors are now becoming concerned that politicians have no concerted plan to deal with a problem that could be starting to run out of control and spread to Spain and Italy, which could well then spell the demise of the euro as we currently know it,” said Michael Hewson, market analyst at CMC Markets in London.

Market talk that China has been a buyer of the euro at lower levels has helped limit downside for the shared currency, particularly versus the dollar, Hewson said. But “with gold and [the] Swiss franc surging to record highs, that is more of an indication of the U.S.’s own problems than any perceived confidence in the euro,” he said.

The dollar also sank to an all-time low versus the Swissie in Asian activity before rebounding to trade 81.74 centimes, a gain of 0.9%. There are 100 centimes in a franc.
Gold and U.S. debt

Gold for August delivery /quotes/zigman/700181 GC1Q +0.52% pushed above $1,600 an ounce in electronic trading on Monday. Read more: Gold futures rise above $1,600 an ounce.

Investors also remain focused on the deadlock over raising the U.S. government’s debt limit, analysts said. The federal government could begin to default on obligations if the debt limit isn’t raised by an Aug. 2 deadline.

Investors want to see an agreement by this Friday, in hopes that would give legislators enough time to draft legislation, wrote analysts at BNP Paribas.

“The assumption across markets remains that a solution will be found, but if the guts of an agreement cannot be settled by then, markets will be subject to another round of stress as the implications of a default on the globe’s ‘risk-free’ asset get priced in,” the strategists said, in a research note.

“Deleveraging would likely see [the dollar] go bid; but other safe- haven currencies would also benefit,” they said.

The British pound /quotes/zigman/4867886/sampled GBPUSD -0.35% bought $1.6084, down from $1.6135 late Friday.

Against the Japanese currency, which also benefits from safe-haven flows, the dollar /quotes/zigman/4868099/sampled USDJPY +0.03% bought 79.05 yen, little changed from ¥79.07 late Friday.

The Australian dollar /quotes/zigman/4867876/sampled AUDUSD -0.40% traded at $1.0614, down from $1.0647 late Friday.

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