x Abu Dhabi, UAETuesday 25 July 2017

US dollar falls as clock ticks down

The dollar sinks and traders grit their teeth for a gruelling day of trading as the US nears its federal debt limit.

The US dollar fell as Congress examined a tentative deal to prevent the world's largest economy from defaulting on its debts and traders prepared for a wrenching day ahead.

Since world markets closed on Friday, the dollar has lost 1 per cent against the euro and 0.9 per cent against sterling.

The US must agree on a deal to raise its US$14.3 trillion (Dh52.52tn) debt ceiling, which it will hit tomorrow unless a deal is reached.

As The National went to press, media reports suggested party leaders in Washington had made significant progress towards reaching a bipartisan deal on raising the debt ceiling.

A framework had emerged for a deal which involves $1tn of immediate cuts and potentially $2.4tn in total budget reductions, Associated Press reported.

Markets in the Gulf were mixed as the stand-off in Washington unravelled, following a dismal week of trading. Saudi Arabia's Tadawul rose 0.6 per cent to 6,392.13 and the Dubai Financial Market General Index rose 0.76 per cent to 1,517.58, although most other Gulf markets fell.

But with many world markets closed for the weekend, currencies were the only measure of market sentiment.

The US dollar also lost 0.4 per cent against the Australian dollar, which is often viewed as a proxy for commodities because of the country's strength as a producer of minerals.

Traders said they expected volatility in Asian equity market futures trading this morning, alongside the US dollar index and US two-year, five-year and 10-year treasury bonds.

The stock market's moves would hinge upon what kind of deal emerges, said Tudor Allin-Khan, the chief economist at AlembicHC.

"If a deal comes out that's very, very positive and very firm on a long-term structural solution, equity markets will do quite well."

In the event of a less credible deal, "you'll see a relief rally, but then people will start asking questions and start speculating about what'll happen next", Mr Allin-Khan said.

Gold, traditionally viewed as a haven during times of uncertainty, closed on Friday at $1,627.20 per troy ounce, having fallen just a few dollars from an all-time high reached only four hours earlier.

The most likely consequence of a deal being reached would be a "big unwinding of safe havens" such as gold and the Swiss franc, leading to a significant boost to the dollar, said Gaurav Kashyap, the head of the Dubai Gold and Commodities Exchange desk at Alpari, an online broker.

However, many fundamental problems remain for the US even if Congress reaches a deal, most notably sluggish economic growth. GDP for the first quarter was recently revised down to 0.4 per cent from 1.9 per cent, US department of commerce figures showed.

"The long-term picture for the US doesn't look good," Mr Kashyap said. "This is also going to be a drag on US equity prices."

The US may also have suffered damage to its international reputation in the eyes of world capital markets that will be hard to reverse, Mr Allin-Khan said.

 

ghunter@thenational.ae