The dollar sank to a three-month low against a basket of major currencies on Wednesday as markets fretted about the prospect of a US debt default and downgrade, while they cautiously waited to see if Japan would intervene to weaken the yen. Traders betting on rate differentials intensified their selling of the greenback following stronger-than-expected Australian inflation data, fuelling the Australian dollar's rally through key resistance to a 29-year peak at $1.1063.
The dollar index dipped to a three-month trough at 73.421 and traders said it was likely to keep falling to its post-Lehman crisis low of 72.696 hit in May. The index later recouped some of its losses to stand at 73.460. Republican congressional leaders delayed action on a plan to raise the US government's $14.3 trillion borrowing limit. The dollar last traded down 0.1 percent at 77.85 yen, nearing a record low around 76.25 plumbed in mid-March. Back then, Japanese authorities, along with their G7 partners, acted to weaken the yen in a rare joint intervention.
A dollar/yen level below 80 yen is significantly increasing costs for Japanese exporters, sparking fears that more top manufacturers, already battered by the March 11 earthquake, will move production abroad. The Australian currency surged almost a full US cent to $1.1063 after the government reported key measures of underlying inflation rose by 0.9 percent in the second quarter, above forecasts calling for a moderate 0.7 percent rise.
The Aussie broke through several key resistance levels, edging towards the top end of a major resistance area at 1.1000 to 1.1083. It broke through psychological resistance at 1.1000, a May 2 high of 1.1012, and the 61.8 retracement of the 1.4900-0.4775 decline at 1.1032. Traders are now eyeing resistance at 1.1083, a wave equality target of the entire decline from 1.4900. The wave equality target is calculated from the all time low on the Aussie.
It also gained 0.5 percent to $NZ1.2629 and 0.8 percent to 86.01 yen. Against the Swiss franc, the dollar held close to a record low around 0.7997 francs, last trading at 0.8012. The euro climbed further above the Ichimoku cloud to a three-week high of $1.4537. It last traded up 0.1 percent at $1.4524.