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Tue 26 Jul 2011 09:41 AM

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Dollar drops to record low versus franc

Currency hurt by Obama's warning that US' burgeoning debt may pose serious risk to economy

Dollar drops to record low versus franc
US dollar and euro currency

The dollar fell to a record low versus the Swiss franc as US president Barack Obama said that the nation’s burgeoning debt threatens to do “serious” damage to the economy.

The dollar slid below 78 yen for the first time since March as Obama urged Congress to address future deficits while lawmakers struggle to reach an accord to raise the nation’s $14.3 trillion debt ceiling by an August 2 deadline. Gains in the yen were limited on speculation Japanese officials will intervene to weaken it. South Korea’s won climbed as the central bank said economic growth will accelerate and on speculation exporters are converting earnings.

“We are seeing a strong negative sentiment on the dollar across the board,” said Tetsuya Inoue, chief researcher for financial markets for Tokyo-based Nomura Research Institute Ltd. “They seem to be focusing on reaching some kind of accord before the deadline, but they are unlikely to go beyond that.”

The dollar dropped to 80.09 Swiss centimes as of 12:17 p.m. in Tokyo from 80.61 in New York on Monday. It earlier reached an all-time low of 80.06 centimes. The yen was at 78.08 per dollar from 78.29. It touched 77.90, the strongest since March 17. Japan’s currency weakened to 113.09 per euro from 112.55. The greenback fell to $1.4485 against the euro from $1.4377.

Obama called on lawmakers to put politics aside to reach a deal on a “balanced” approach and blamed the current stalemate on a group of Republicans in the House who are insisting on budget cuts and no tax increases.

 “If we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy,” Obama said in a prime-time address from the White House.

House Speaker John Boehner and Senate Majority Leader Harry Reid unveiled their own proposals on Monday. Obama endorsed Reid’s plan and said that Boehner’s measure is simply “kicking the can further down the road.” Both sides will have to compromise further, Obama said.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell to 73.684 from 74.102. The index earlier reached 73.682, the lowest since June 8.

“Just like a meltdown at a nuclear power plant, a U.S. default will trigger an incident that’s too scary to imagine, so people can’t buy the dollar when there’s such a risk, however small,” said Daisaku Ueno, Tokyo-based president of Gaitame.com Research Institute Ltd., a unit of Japan’s largest online currency broker. “Currencies such as the Swiss franc or Japanese yen continue to be preferred.”

The franc gained 0.1 percent on Tuesday, according to Bloomberg Correlation-Weighted Currency Indexes, which track the currency against the foreign exchange of nine developed nations. The yen slipped 0.3 percent, while the dollar was 0.6 percent weaker, the indexes show.

Moody’s Investors Service on Monday downgraded Greece to its second-lowest rating. The European Union support package for Greece allows an “orderly default” and buys time, Moody’s said.

Japanese Finance Minister Yoshihiko Noda on Tuesday said currency moves have been one-sided and that he will continue to watch the yen closely. Bank of Japan Governor Masaaki Shirakawa said on Monday that the currency’s strength could hurt the economy and the central bank is ready to take appropriate action as needed.

 “I’m bearish on the yen,” said Koji Fukaya, chief currency strategist at Credit Suisse Group AG in Tokyo. “To prevent the yen from strengthening beyond a record and into the 75 range, intervention should start much sooner. An intervention will be no surprise with the yen anywhere beyond 80.”

There were no signs that Japan’s central bank intervened in currency markets on Tuesday to weaken the yen, according to traders. Japan’s currency dropped from 78.10 per dollar to as low as 78.70 within a minute at about 11:06 a.m. in Tokyo.

“Substantial dollar buying seems to have triggered” automatic orders, pushing the dollar up briefly against the yen, said Yuji Saito, director of the foreign-exchange department at Credit Agricole Corporate and Investment Bank in Tokyo.

Group of Seven nations jointly sold the yen on March 18 after it reached a postwar record of 76.25 to the dollar the previous day, saying in a statement they wanted to reduce “excess volatility and disorderly movements.” Japan’s Finance Ministry sold 692.5 billion yen ($8.9 billion) that month in its first currency intervention since September.

South Korea’s growth will pick up in the second half of the year and policy makers will tackle inflation, Bank of Korea Deputy Governor Kim Jae Chun said in an interview on Monday.

“The BOK’s comments on the economy are supportive of the won, which will likely continue its strong momentum into the second half,” said Bae Jin Chul, a Seoul-based dealer at the state-run Industrial Bank of Korea. “The market is receiving a steady flow of month-end dollar sales from exporters as well.”

The won appreciated 0.4 percent to 1,051.65 per dollar.

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