US dollar: Moody's helps deal a double blow

The euro dollar exchange rate is 0.396% higher on the day with 1 EUR = 1.4201 USD at 9 AM in London. The pound dollar exchange rate is 0.087% higher with 1 GBP = 1.6118 USD. The dollar exchange rate was dealt a double blow over the past 12 hours. Moody’s put the US sovereign rating on review for a possible downgrade, citing a lack of progress in negotiations on raising the US debt ceiling. The dollar sold off in response, and losses were especially pronounced against the JPY and the CHF. Earlier, Fed Chairman Bernanke’s testimony to Congress set a relatively dovish tone and comments suggesting that the option for further
stimulus remains open stoked fears of another round of QE. Bernanke’s speech largely repeated themes from his June 22 comments but the Fed is clearly keeping an open stance on policy until a significant trend in data emerges. "While Fed Chairman Bernanke's Congressional testimony stuck largely to a familiar script on the still cautious outlook, markets were quick to react when he explicitly mentioned the possibility of further quantitative easing. What was overlooked were his remarks about Fed research suggesting that QE2 may only have lowered long-term interest rates by 10-30bp and raised jobs by some 30k per month. If this is all QE2 could do, why would another round of QE hold much promise for the economy? For further details, please see “What Promise In QE3?” says Gareth Berry at UBS. Elsewhere, the euro shook off uncertainty over the timing of a potential emergency meeting in the Eurozone and a Fitch downgrade of Greece. EURUSD traded 1.4131-1.4282. USDJPY traded 78.47-79.61. Eurozone core CPI and US jobless claims are due.

Forex - EUR/USD close to 5-month low on debt contagion fears

The euro was hovering close to a five-month low against the U.S. dollar on Tuesday, pressured by growing concerns that the euro zone’s debt crisis was spreading to Italy as government bond yields rose sharply. EUR/USD hit 1.3838 during European early afternoon trade, the pair’s lowest since March 11; the pair subsequently consolidated at 1.3924, shedding 0.75%. The pair was likely to find support at 1.3751, the low of March 11 and resistance at 1.4061, the days high. Earlier in the day, the cost of insuring Spanish, Portuguese and Greek sovereign debt against default surged to euro-lifetime highs, while 10-year Italian bond yields rose to more than 6% for the first time since the inception of the single currency. Also Tuesday, Dutch Finance Minister Jan Kees de Jager said the possibility of a partial default by Greece in order to put the country’s debt on a more sustainable footing could no longer be ruled out, despite the European Central Bank’s opposition to such a move. The single currency also came under pressure after International Monetary Fund head Christine Lagarde said the institution was not ready to discuss a second bailout package for Greece. Elsewhere, the euro was trading close to a record low against the Swiss franc, with EUR/CHF tumbling 1.14% to hit 1.1583. Later in the day, finance ministers from all 27 European Union nations were to meet to discuss measures to contain the debt crisis. Options included increasing the size and flexibility of the euro zone’s bailout fund, the European Financial Stability Facility and lengthening the maturities of loans and lowering interest rates for bailed out countries.