The US dollar
took a big hit against the majors starting in the early moments of the European trading session despite the US government managing to avoid the worst-case scenario of a technical default.
The dollar had already witnessed a relief rally when it priced in a debt deal late Wednesday. However, dollar strength was only temporary as investors realize that US politicians were only able to put together a temporary solution to a problem that will have to be revisited early next year.
Damage to the faith and credibility of the dollar may have already been done. Whether that damage is reversible remains to be seen as investors are sure to take note of the experience of the threat of default.
Evidence of that damage can be seen in Fitch's move to place the USA credit rating under negative watch. The country faces the risk of losing its second triple-A rating from a major rating agency. While an argument can be made about the impact of these downgrades, - especially considering limited availability of top-grade investments and the credibility of rating agencies partially responsible for the credit crisis-, investors are taking notice of US creditworthiness or lack thereof.
For instance, Chinese rating agency Dagong downgraded the United States to A- from A this morning and maintained a negative outlook on the sovereign credit. "The government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future," Dagong said in a press release.
Although Dagong's ratings are hardly followed outside of China, it must be noted that the Asian country is the largest foreign buyer of U.S. Treasuries, with 11% of the US debt held by the public.
As such, foreign demand for US debt could be damaged going into the future, which could potentially increase the market's dependence on the Federal Reserve's asset purchases. There are negative implications for the dollar's status as the world's reserve and safe-haven currency.
In this regard, it is no surprise that the US dollar is being punished shortly after the temporary US 'fix' despite the remarkable stability it had shown throughout the whole debt-ceiling drama that started in October.
FX price action
EUR/USD has shot up from 1.3560 to 1.3639 without much of a drawback. The single currency appears set to revisit the October 3rd high of 1.3647 or this year's high of 1.3710.
The GBP/USD saw a similar move take it from 1.5980 towards 1.6097 and appeared to be given an extra push thanks to strong retail sales figures. Since the start of the week, the currency pair appeared to be in a power struggle between the bulls and the bears to consolidate a reversal from the 1.6250 mark. The 1.61 handle is now up for grabs.
The same momentum has taken the USD/JPY from 99 to 98 in a matter of hours but especially at the turn of the European session.
The Swiss franc is also well-bid against the US dollar although apparently at a more modest rate. The USD/CHF surged about 60 pips to trade at around 0.9050 this morning.
Price action suggests that the US dollar has not yet found a bottom against the majors before the focus returns to economic fundamentals and the Fed.