Moody’s May Downgrade US Credit Rating - 14.7.2011

US Dollar The dollar dived yesterday after Moody’s Investors Service announced a review for a credit rating of the US for the first time since 1995, due to a lack of progress to raise the 14.3 trillion dollar debt limit, before the government exceeds its borrowing authority in August. The US President Barack Obama and congressional leaders have as yet failed to reach a compromise on reducing deficits and raising the debt ceiling. The agency said in a statement political disagreement may finally lead to a “short-lived default.” Treasurys aren’t reacting much, however, with the 10-year yield at 2.90%. Moreover the US currency fell against its major counterparts, when even earlier the Fed President Bernanke said he had prepared to provide more stimulus if needed, including several “untested” means, which could be used to stimulate growth if the economy deteriorates further. Bernanke also warned a failure by Congress to raise the 14.3 trillion debt limit would send “shock waves” through the financial system. After predicting the economy will strengthen during the second half of 2011, Bernanke left open the door to further stimulus by saying that falling home prices, hard-to-get loans and 9.2% unemployment pose long-term obstacles to growth. The greenback fell to a new record low against the Swiss franc 0.8081 and touched a four-month low against the Japanese yen today 78.46 – two traditional refuge currencies. As for importaint macroeconomic data, today investors will be closely watching retail sales and producer prices reports. US retail sales fell by 0.1% in June, following a 0.2% decline in May, according to expectations, while PPI accelerated to an annualized 7.4% pace, economists say. The dollar index, which measures its performance against a set of six other major currencies, dropped to 75.213 from 76.028 on Tuesday. Euro The euro recovered yesterday from its 4-month low against the dollar (1.3837) and rose above 1.42, but fell to a record low against the Swiss franc – 1.1492. The single currency remains under pressure as investors do not have confidence about debt problems solution. Yesterday reports showed euro zone industrial pruduction increased by 4% in May after a 5.3% gain in April and compared with expectations of a 4.8% advance. Today will be released consumer prices data for June. According to estimations, the CPI remained unchanged at 2.7% annual pace, as well as the core index, witch excludes some volatile categories, at 1.5%. Despite the existent worries over the European debt and Italian government bonds in particular, the yields were rather lower today. Italian 10-year securities’ yields fell to 5.42% from above 6% a few days ago. Italy should meet this year’s budget goal and adherence to fiscal targets would be consistent with stabilizing the nation’s credit rating, Fitch Ratings said. British Pound The pound fell sharply against the euro yesterday after a 3-day advance as a report showed the number of jobless claims increased in June by 24500, the biggest increase since May 2009, fueling concern that the economic recovery is stalling. Economists predicted a 15000 surge after 22500 in the previous month. Moreover a day before another report showed inflation unexpectedly slowed and retail sales slid in June, making investors to reduce bets that the Bank of England will increase interest rates from a record low, even as inflation accelerates by more than twice of its 2% target. Consumer prices decreased to 4.2%, the Statistics office said. However the Bank of England Governor Mervyn King said inflation “should fall back towards the target during the next two years.” The central bank is probably going to keep record monetary stimulus as the British economy grew just by 0.1% in the second quarter from the previous three months, the National Institute for Economic and Social Research said last week.