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Foreign Exchange

Euro gets boost as Moody’s and S&P address US rating doubts

The euro is finishing the trading week on a stronger note after both leading ratings agencies warned about the sustainability of the US economy’s AAA credit rating.

Late on Wednesday, Moody’s said that it might review the US rating for a possible downgrade. A day later, Standard & Poor’s warned that there was a 50/50 chance it might lower the rating as soon as this month if talks between the White House and the Republican party remain unresolved.

US lawmakers have until August 2 to come to an agreement to increase the nation’s legal borrowing limit of $14.3 trillion, while there are also fears of the country missing interest payments. Concerns were stoked after it was reported that president Barack Obama had walked out of budget talks with Republicans late on Wednesday. Still, the Wall Street Journal reports today (July 15) that lawmakers are working on a plan B. That would entail a package of spending cuts, as already proposed by Republican leader Mitch McConnell, and would give Obama power to raise the debt ceiling in three instalments.

Traders report good buying interest in the euro across a broad range of client types (macro, corporate and reserve managers) over the past 48 hours. Nonetheless, with all the negative news coming out Europe, particularly relating to Greece and Italy, not to mention the release of the results of the European bank stress tests (surveys suggest that 5-15 banks will fail, six of which are Spanish), is this the time to buy euros?

Not really, say traders. Attention may well shift to the Swiss franc and yen as more favoured currency pairs for a pure US dollar play. The dollar is likely to come under increasing pressure as the August 2 deadline gets closer.

“The further we seem to be moving away from an agreement, the greater impact we’re going to see on the dollar, which is why we should see dollar-yen and dollar-Swiss franc come under pressure,” says a head G10 trader at a UK-based bank. “They’re the more natural dollar trades out there.”

While most traders are playing the dollar on a very short-term basis, some tell EuromoneyFXNews that resolution of the debt ceiling issue will create a strong dollar-buying signal.

Still, Goldman Sachs in its global FX monthly update published today says broad dollar weakness remains its core view, underpinned by structural rather than fundamental concerns, where its large twin deficits are likely to persist into the future. Furthermore, the Federal Reserve's overall monetary stance contrasts with that of the rest of the world, with it unlikely to raise interest rates till the end of 2012.

Technical trading advisory and investment firm, PIA First, today recommends selling the euro versus the dollar after it traded at 1.4138, and traders should look to take profit at 1.4070. PIA First also has a short-term buy recommendation for the dollar against the yen, after four days of bearish momentum. However, its one-week and three-month outlooks remain bearish, with sell targets at 81.49 (currently trading at 79.20).

On the dollar versus the Swiss franc, PIA says while the currency pair has shown some gains in early trading, general strength is countering this move. The firm says there is a clear trend and it has removed its recommendation to buy dollars on a break of 0.8120 or 0.8181 (currently trading at 0.8183).

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