Dollar falls after Moody’s debt warning

TOKYO—The dollar fell further in Asia Thursday after Moody’s ratings agency threatened the United States with a downgrade and as the US Federal Reserve chief indicated further stimulus action was possible.

The dollar fell to 78.72 yen in Tokyo morning trading from 78.98 in New York late Wednesday.

The row over US debt took pressure off the euro, which firmed to $1.4227 from $1.4168, and to 111.99 yen from 111.76 yen.

The greenback took a hammering after Moody’s on Wednesday placed the United States’s triple-A debt rating on a downgrade watch because of rising prospects the US debt limit will not be raised in time to avoid default.

“The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes,” Moody’s said.

The action came as US President Barack Obama and Democratic lawmakers and their Republican counterparts held a fourth straight day of talks to try to hammer out an agreement on a deficit-reduction budget.

Republicans are refusing to lift the country’s $14.29 trillion debt ceiling without deep government spending cuts, and they reject Democrats’ demand that tax increases must be part of any sweeping deficit reduction plan.

With the yen rising on the dollar’s woes, markets are monitoring responses from Tokyo concerning the unit’s strength as it hovers near its strongest level since spiking to a post-war high following the March 11 earthquake and tsunami.

That move prompted a concerted intervention from Japan and its Group of Seven counterparts.

Japanese Finance Minister Yoshihiko Noda told reporters Thursday, “I think the movement of the currency lacks balance, not representing the economic conditions.”

“I don’t want to see it stay in that way. I will continue watching the market carefully,” he said.

Comments by Federal Reserve chairman Ben Bernanke also boosted risk appetite, helping fuel the dollar’s decline, as he told legislators Wednesday that the Fed was “prepared to respond” if stimulus was needed.

This signalled to some that he was keeping the door open for a third round of quantitative easing.

The US central bank in June wound up its $600-billion “QE2” bond purchasing programme to boost the economy with easy liquidity.

“As the US economy has been weaker than previously thought, Bernanke’s remarks gave rise to a view that a possibility is growing for additional stimulus measures to follow QE2,” said Dai Sato, dealer at Mizuho Corporate Bank.

“The focus has temporarily shifted from the eurozone debt woes to the US issues. The market will monitor US economic indicators to confirm the state of the economy,” Sato said.

Even with the crisis in Europe, the euro is enjoying good support against the dollar from the row over the US debt ceiling and the fragile fiscal position in the US, National Australia Bank chief currency strategist John Kyriakopolous said.