Search for safe havens as US budget impasse continues
Dollar falls sharply and gold touches record high as IMF chief piles on political pressure
Wednesday 27 July 2011
The US dollar fell to a record low against the Swiss franc and gold traded within a whisker of its all-time high as the failure to resolve the American debt crisis intensified the scramble among investors for safe-haven assets.
Christine Lagarde, the new chief executive of the International Monetary Fund, put pressure on Republican and Democrat politicians to end their deadlock over the terms of an agreement to raise the US debt ceiling to $14.3 trillion (£8.7trn), as they edged closer to a devastating default which she said would have serious consequences for the global economy.
Ms Lagarde said: "On the debt ceiling, the clock is ticking and clearly the issue needs to be resolved immediately. Indeed, an adverse fiscal shock in the United States could have serious spillovers on the rest of the world. But, more fundamentally, a credible fiscal adjustment plan is needed sooner rather than later."
The dollar dropped to a record low of 0.799 Swiss francs and slid below 78 yen for the first time since March, while gold hovered around Monday's all-time high of $1,622.49 an ounce as the US debt stand-off undermined the American currency and its Treasuries – traditionally regarded as safe-haven bonds in times of trouble. Ms Lagarde was speaking the morning after a live televised address from President Barack Obama late on Monday night in which he warned that failure to raise the debt ceiling would have grave consequences.
"For the first time in history, our country's triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet," Mr Obama said.
In comments that suggested any agreement was still a way off, he added: "I have told leaders of both parties that they must come up with a fair compromise in the next few days that can pass both houses of Congress – a compromise I can sign up to."
Mr Obama warned against a "reckless" outcome if the debt ceiling is not raised, with John Boehner, the Republican House Speaker, responding by accusing the President of seeking a "blank cheque".
Although both sides agree there is a need to raise the debt ceiling, they cannot agree a package of tax increases and spending cuts that should accompany the increased borrowings.
Despite little sign of movement, Gene Sperling, Obama's top economic adviser, said yesterday that Republicans and Democrats could still reach a budget deal this week if the sides show a "minimum amount of compromise".
Treasuries are rapidly losing their status as a safe-haven asset as Tuesday's deadline for raising the debt ceiling looms, since the lack of a deal would push the US into default and its government bonds would tumble in value. In a note yesterday, Moody's, the ratings agency, said that "fund managers have been de-risking their portfolios by reducing exposure to US Treasuries and government securities and have been developing contingency plans in the event that there is a US sovereign default or the US credit profile deteriorates further."
Moody's published its note shortly before a, normally routine, auction of $35bn-worth of two-year US Treasuries. Although the debt was sold comfortably, interest from foreign investors was weaker than normal.
Although most economists expect a deal to be clinched at the last moment, the looming deadline is spooking investors already nervous about the outlook for the hugely indebted European Union and the US.
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