By William L. Watts and Lisa Twaronite, MarketWatch
FRANKFURT (MarketWatch) — The dollar proved resilient Friday morning to a warning by a second ratings company that U.S. government debt could soon be downgraded if President Barack Obama and congressional leaders are unable to resolve debt-limit talks and avoid a default.
For now, worries about Europe’s debt crisis appear to be overshadowing the ongoing drama in Washington, strategists said, with euro-zone leaders appearing no closer to finalizing a second aid package for Greece.
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The euro EURUSD +0.18% traded at $1.4141, little changed from $1.4139 late Thursday. The 17-nation shared currency traded as high as $1.4199 in earlier action, finding an initial boost versus the dollar on S&P’s U.S. downgrade warning. See real-time currency quotes and tools.
“Germany and the Netherlands yesterday refused to attend a summit unless an agreement was already reached, which suggests they are digging in their heels, but other sources suggest Germany is bowing to the pressure to give up on ‘private sector involvement.’” in a second Greek bailout, said Adrian Schmidt, currency strategist at Lloyds Bank in London.
“Nothing is clear, but the longer we go on without any progress, the more chance that the euro resumes its decline,” Schmidt said.
Meanwhile, nervousness ahead of the publication of the latest round of stress tests on European banks late Friday is also weighing on sentiment toward the euro, analysts said.
The dollar index DXY -0.01% , which tracks the U.S. unit’s performance against a basket of six other major currencies, was at 75.355, up from 75.245 on Thursday.
S&P said that ”owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days.”
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A day earlier, rival Moody’s Investors Service said it put the U.S. government’s Aaa bond rating on review for possible default due to a “small but rising risk” of a short-lived default.
Talks between President Barack Obama and congressional leaders ended Thursday with no deal to raise the debt ceiling or cut spending. However, some leaders were reportedly working on a backup plan to keep the government from defaulting. Read more on debt-ceiling talks.
“There is something faintly silly about the leaders of an economic superpower bickering about whether to agree to borrow more money, when none of them has any intent to stop spending it,” said Kit Juckes, head of forex strategy at Societe Generale in London. “ A bigger focus should be on an economy that is still faltering.”
Meanwhile, the Europeans must decide how they want to go about requiring private bondholders to share in the cost of the Greek bailout “and avoid the lunacy of indecision” that has boosted borrowing costs across much of Europe, he said.
Against a backdrop of “political madness” on both sides of the Atlantic “all the other currencies in the world seem more attractive than the terrible twos of the euro and U.S. dollar, somehow,” he said, in a note to clients.
Juckes said he favors the Korean won and Singapore dollar in Asia, the Norwegian krone, Swedish krona and Swiss franc in Europe, while expecting little from the euro/U.S. dollar or dollar/yen pairs, while another spike higher by gold wouldn’t be a surprise.
Against the yen, the dollar USDJPY +0.01% bought ¥79.23, compared with ¥79.15 late Thursday. The euro EURJPY +0.20% bought ¥111.95, little changed from ¥111.90.
The Australian dollar AUDUSD -0.59% traded at $1.0647, down from $1.0713 late Thursday.
The British pound GBPUSD -0.13% bought $1.6088, down from $1.6137.
William L. Watts is a reporter for MarketWatch in Frankfurt.Lisa Twaronite is MarketWatch's Tokyo bureau chief.
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