FOREX-Dollar sinks to 3-month low on U.S. debt woes

TOKYO, July 27 (Reuters) - The dollar sank to a three-month low against a basket of major currencies on Wednesday as markets fretted about the prospect of a U.S. debt default and downgrade, while they cautiously waited to see if Japan would intervene to weaken the yen. 

Traders betting on rate differentials intensified their selling of the greenback following stronger-than-expected Australian information, adding to the dollar's broad decline and fuelling the Aussie dollar's rally through key resistance to a 29-year peak at $1.1063 . 

"The dollar became even less pretty as, on top of the U.S. fiscal issues, Australian inflation information reminded investors about the higher inflationary surroundings in Asia's fast-growing markets," said a trader for a Japanese bank who did not require to be identified by name. 

Month-end selling by Japanese exporters also pressured the U.S. funds towards an option barrier around 77.50 yen, dragging it to a four-month low of 77.78 yen and fuelling speculation that Tokyo may step in to the market to curb the yen's rise. 

While analysts say the government may have funds on hand to pay its bills until the middle of next month, there's still no signs of panic as markets hold out hope the log jam could still be broken. 

The dollar index dipped to a three-month trough at 73.421 and traders said it was likely to keep falling to its post-Lehman crisis low of 72.696 hit in May, after Republican congressional leaders delayed action on a plan to raise the U.S. government's $14.3 trillion borrowing limit. 

"They still think there will be a positive resolution reached, but I suspect it is not going to be to satisfy the ratings agencies," said Joseph Capurso, strategist at Commonwealth Bank in Sydney. 

Indeed, analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit standing from at least major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.


The dollar last traded at 77.85 yen, nearing a record low around 76.25 plumbed in mid-March. Back then, Japanese authorities, along with their G7 partners, acted to weaken the yen in a rare joint intervention. 

"For now, I think we are still taking a look at more downside to the dollar/yen, that is likely to continue until the dollar falls towards historic lows (against the yen)," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo. 

"This trend may be reversed one time they receive a deal on the U.S. debt, but a come-back above 80 yen will be impossible. That is, of work, if they don't have an intervention by the BOJ," they said. 

Fukaya added that while they would not be surprised by an intervention at any time, taking a look at the money levels, it is more likely to happen after a U.S. deal is struck, with the Tokyo authorities trying to strengthen the impact from a feasible relief rally in the dollar. 

Dollar/yen below 80 yen is significantly increasing costs for Japanese exporters, sparking fears that more top Japanese manufacturers, already battered by the March 11 earthquake, will move production abroad. 

The Australian money surged very a full U.S. cent to $1.1063 after the government reported key measures of underlying inflation rose by 0.9 percent in the second quarter, above forecasts calling for a moderate 0.7 percent rise. 

Japanese exporters expect an average rate of 82.59 yen this fiscal year, according to the BOJ June tankan survey, versus the average rate of about 81.60 yen in April-June. 

The Aussie broke through several key resistance levels, edging towards the top fringe of a major resistance area at one.1000 to one.1083. 

It broke through psychological resistance at one.1000, a May two high of one.1012, & the 61.8 retracement of the one.4900-0.4775 decline at one.1032. Traders are now eyeing resistance at one.1083, a wave equality target of the whole decline from one.4900. The wave equality target is calculated from the all time low on the Aussie. 

Against the Swiss franc, the dollar held close to a record low around 0.7997 francs . The euro climbed further above the Ichimoku cloud to a three-week high of $1.4537 . Market players cited stop-loss euro bids at levels above the overnight high, while offers are seen higher above, in the $1.4550 to $1.4580 area. (Additional reporting by Ian Chua & Reuters FX Analyst Krishna Kumar in Sydney; Editing by Edmund Klamann)

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