Dollar near 6-wk high as sovereign debt crisis dominates

Dated Posted: 2011-11-22

TOKYO, Nov 22  - The dollar stuck near a six-week high against a basket of currencies on Tuesday on a sharp pullback in global risk appetite as the sovereign debt storm intensified on both sides of the Atlantic.

Severe dollar funding strains supported the U.S. currency as European banks scramble to secure cash dollars, with the dollar money market seizing up and investors fearing that a fall in euro zone government bond prices could pummel European banks.

Commodity currencies such as the Australian dollar bore the brunt of the market's fears, though they recouped some of their heavy losses, while the euro escaped with only modest losses as bears stayed cautious given the already huge bets made against the currency.

"There is no fundamental change in the markets' risk averse mood. There's been no clear progress in the euro zone," said Koji Fukaya, chief FX strategist at Credit Suisse.

"Given the funding shortage in the dollar, the dollar is unlikely to fall much at least until the end of the year."

The dollar index held steady in Asia at 78.34, near a six-week high of 78.516 hit overnight, as European and U.S. stocks skidded and funds fled to Treasuries.

Stress in the dollar money market showed no sign of abating, with the cost of swapping the euro and the yen for dollars still on the rise.

The one-year dollar/yen currency swap spread rose to a new peak of 77 basis points, surpassing the previous record hit in 2008, while the three-month euro/dollar swap spread rose to 140 basis points, the highest level since late 2008.

In a similar sign, the discount for dollar/yen forwards and the premium for euro/dollar forwards kept rising as well.

"Everything is reminiscent of the days after the collapse of Lehman Brothers," said a trader at a Japanese bank.

The dollar hardly budged after ratings firm Fitch repeated that a failure by a U.S. congressional committee to reach agreement on the country's deficit would likely result in a negative rating action -- most likely a revision of the rating outlook to Negative, rather than a downgrade.

"If there was a downgrade of the U.S. credit rating, the dollar would be sold off. But that seems unlikely in the very near future," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

Moody's Investors Service said failure of itself would not lead to a rating change while Standard & Poor's said the news validated its decision to make its first U.S. credit downgrade in August.

Source:  Reuters