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Sun 10 Jul 2011 11:27 AM

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Dollar likely to trend lower without debt limit progress

US dollar fell against yen, Swiss franc and sterling on Friday as dismal US jobs data hurt the currency

Dollar likely to trend lower without debt limit progress
MONEY MATTERS The euro is down 2 percent against the dollar this week, its biggest weekly decline since June 12 at current prices (Bloomberg Images)

The dollar is likely to trend lower in the week ahead in the aftermath of an abysmal US jobs report on Friday and without clear signs of progress on the approaching US debt ceiling deadline.

The US dollar fell against the yen, Swiss franc and sterling on Friday as significantly weaker-than-expected US jobs data raised expectations that the Federal Reserve will leave interest rates low well into next year.

The US Treasury runs out of cash to pay its bills on August 2 unless the government is legally allowed to borrow more. With the United States long regarded as the most stable country and with its currency used as the global reserve, even talk of a US default has sent shudders through global markets.

The rapidly approaching deadline has for now overshadowed debt problems in the euro zone.

Friday's jobs report showing only meager growth in June payrolls added to the gloom surrounding the US dollar as investors see the government and Federal Reserve as failing in efforts to stoke economic growth despite a huge stimulus programme and rise in borrowings.

"US policy (on debt) has been extend and pretend," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "We've come to an end of that."

The euro is down 2 percent against the dollar this week, its biggest weekly decline since June 12 at current prices, while the dollar is down 0.2 percent against the yen. The euro is now up 6.5 percent against the dollar year to date, while the dollar is down 0.7 percent against the yen in 2011.

One-month euro/dollar risk reversals last traded at -2.825 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise.

But investors are less bearish than a few weeks ago when the same risk reversal traded at -3.4, its lowest since June 2010.

Trying to break a budget deadlock and allow for an increase in the $14.3 trillion debt ceiling, Obama and congressional leaders are aiming for more than $2 trillion in budget savings and possibly as much as $4 trillion.

With Republicans and Democrats still far apart, president Barack Obama has scheduled another round of talks for Sunday.

"It's not like there's some imminent deal about to happen," said House of Representatives speaker John Boehner at a news conference. "There are serious differences about how to deal with this very serious problem.

While no deal is expected, investors will be seeking any clue that there is at least some compromise.

"Any headline indicating they are closer to an agreement will be dollar positive," said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in New York.

US employment growth ground to a near halt in June, data from the US Labor Department on Friday showed, with employers hiring the fewest workers in nine months, damping down hopes the economy was on the cusp of regaining momentum after stumbling in recent months.

The euro initially tumbled to a session low of $1.4204 on Reuters data, then trimmed losses, with traders saying the sharp drop toward the $1.42 level triggered short-term buying.

It last traded at $1.4244, down 0.8 percent on the day.

"It's a terrible number, there is no good news you can glean from it," said David Semmens, US economist at Standard Chartered in New York, of the payrolls data. "I don't think this puts pressure on the Fed to do more, though."

Speculators increased bets against the dollar at least up to the Tuesday before the jobs report was released, according to CFTC data made public on Friday.

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