Moody’s weakened the USD

illustration: us dollar

(14.07.2011) Moody’s yesterday warned that the US top rating may be reduced if the debt ceiling is not lifted in due course. A meeting between president Obama and republicans failed to succeed. Hence the USD weakened. Today the parties will meet again. In addition US retail sales will be released this afternoon.

By Knut A. Magnussen, Senior Economist at DNB Markets

After the US markets had closed yesterday Moody’s released at statement on US government debt. The rating agency warned that the top rating may be reduced if the debt ceiling is not lifted within short time. Moody’d said that the risk of default was small but that a credible agreement with long-term deficit reduction measures had to be achieved in order to keep the rating.

The meeting between president Obama and republican law makers failed yesterday. According to Cantor, the no 2 republican leader, Obama left the meeting in protest. However, the parties will meet again today. The USD fell and has weakened by 1.4% vs the EUR during the past 24 hours.

Elsewhere in the markets the mood was somewhat better yesterday. Stock markets in Europe and in the US rose, while the Asian markets fell (after Moody’s). The Oslo stock exchange climbed 1.4% yesterday became the winner.

Long rates in the US and Germany stayed low, while the oil price and the price of gold rose, and is approaching 1600 USD per unse. The latter indicates that investors are still very worried over the European situation. Italy yesterday had to pay 3.67% for a 12 month government loan, far higher than what was expected in advance.

The markets are now waiting for the stress tests for European banks due tomorrow.

The Fed governor Mr Bernanke yesterday gave his semi annual speech to Congress. However, there was little news in the speech compared to the FOMC-minutes released on Tuesday. Fed seems to believe that the weakness in the first half is temporary, but that the central bank is ready to simulate more if necessary. However, it seems not very likely that QE3 will be implemented as long as inflation is rising.

Only a few US data were released yesterday. Export prices rose a bit, but import prices fell as expected. The strengthening of the US dollar recently may lead to lower import price inflation going forward. Today the US retail sales are due. It is expected that overall sales will increase by 0.3% and that sales exclusive of cars will pick up by 0.2%.

Industrial production in the euro zone rose by a meagre 0.1% in May. An increase of 0.5% was expected according to Reuters. This was disappointing as German and French production rose substantially. Hence it seems that GDP will grow much less rapidly in Q2 than in Q1.

British labour market indicators showed signs of weakness. Unemployment rose more than expected in June. The increase was 24.500 persons – the most rapid increase since May 2009. In addition unemployment was revised higher for May. It now seems that the fiscal tightening is hampering the labour market. However, the LFS-unemployment rate was stable at 7.7% in April. Wage growth is still low in the UK. In may wage growth was reported at 2.3%. With inflation well above 4% this implies that real income is falling substantially and hence is dampening household demand.