A failure by President Barack Obama and U.S. lawmakers to reach an accord raising the debt ceiling and cutting the budget deficit may fuel a short-term rise in the dollar as investors seek safety, according to Citigroup Inc.
“When risk aversion picks up and uncertainty dominates market psychology, people look for the most liquid and deepest markets they can find, and that’s historically been U.S. Treasuries and U.S. dollars,” Andrew Cox, a currency strategist at Citigroup in New York, said in a telephone interview.
The stalemate between the White House and congressional Republicans over increasing the $14.3 trillion debt ceiling and reducing the deficit has pushed stocks down and is likely to contribute to a move away from higher-risk assets, Citigroup said in a note to clients today.
Standard & Poor’s reiterated July 21 it may cut the U.S. debt rating to AA+ from AAA if a deal is reached that doesn’t address the U.S.’s long-term debt burden. The New York-based ratings company said the chance of a downgrade during the next three months is 50 percent. It placed the rating on “CreditWatch” for a downgrade on July 14.
House Speaker John Boehner of Ohio told fellow Republicans he was determined to force action on a two-step debt-limit extension that would provide a roughly $1 trillion, shorter-term increase than President Barack Obama has requested, defying a veto threat and the administration’s warnings of dire economic consequences.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, declined 0.1 percent today to 74.105 in New York. The measure reached 73.889 on July 21, the lowest level since June 9.