The dollar dropped broadly on Tuesday and investors expected it to continue to depreciate as long as US lawmakers fail to reach a compromise on a budget plan to prevent the country from defaulting on its debt. The dollar hit a record low against the Swiss franc, a traditional safe haven, falling below a key option barrier at 0.80 franc. It also dropped to a four-month trough versus the yen and a three-week low versus the euro.
A warning from President Barack Obama that failure to raise the US borrowing limit by the August 2 deadline would severely hurt the nation sparked selling of the dollar and tarnished its traditional safe-haven appeal. "The US debt ceiling impasse is killing the dollar," said Kathy Lien, director of currency research at GFT Forex in New York. Democrats appear willing to accept a deal that does not include tax increases, but it remains unclear whether there will be a temporary increase in the debt ceiling or a more permanent one that persist through the November 2012 presidential election.
While the dollar has dropped smartly, it could fall even further if the deficit reduction plan falls short and triggers ratings changes by Standard & Poor's, Moody's or Fitch. Indeed, according to a Reuters poll of economists, the US will lose its top-notch AAA credit rating from at least one major rating agency.
Executives at Standard and Poor's and Moody's Investors Service are scheduled to testify before Congress on Wednesday. A downgrade of the credit rating of the US is a bigger risk than a default and could add up to 0.7 percentage point to bond yields over time, members of US securities industry group SIFMA said on Tuesday.
The euro hit a session high of $1.4525, its strongest July 5. It was last at $1.4518, up 1 percent. The dollar hit a record low versus the Swiss franc at 0.79970 franc on trading platform EBS. Against the yen, another safe-haven rival, the dollar also fell, hitting 77.828 yen, its weakest since mid-March, when major central banks acted in concert to stem the yen's rise. Against a currency basket, the dollar fell 0.8 percent to 73.498, its weakest since early June.