It was the euro, not the dollar, that bore the brunt of Standard & Poor's downgrade of the U.S. credit rating to double-A-plus Monday. Rattled traders ran to the Swiss franc and the yen, abandoning riskier currencies more closely tied to economic growth.
The euro was the focal point of a massive move away from nearly all higher-yielding currencies, at one point trading down as much as 3% against the safe-harbor Swiss franc, hitting a new all-time low of CHF1.0619. The dollar and U.K. pound also hit new all-time lows against the franc, though their declines were milder.
Many analysts believe the euro is still stronger than it should be, given that most of the currency's gains came on projections of strong global economic growth. With the U.S. potentially slipping back into recession, and even emerging markets showing some signs of slower expansion, the euro could stand to drop to its true value estimated of $1.20, rather than Monday's $1.42.
The euro zone's debt problems also appear to be worsening, further undermining the common currency. On Monday, French credit-default swaps widened significantly on fears that France also faces a downgrade from its triple-A rating. Traders view such a development as possibly the next serious stress point for the euro zone because France's triple-A rating helps back a triple-A rated European Financial Stability Facility. That fund is viewed as an essential emergency bailout fund for the euro zone's most vulnerable economies should they run into fresh troubles.
"The French AAA underpins the AAA rating of the [European Financial Stability Facility] and any downgrade would put the entire rescue mechanism in question," said Steven Englander, head of G10 strategy at Citigroup in New York.
That French news overwhelmed news that the European Central Bank also bought Italian and Spanish bonds for the first time, driving yields on Italian and Spanish debt sharply lower.
Late Monday, the euro was at $1.4180 from $1.4275 late Friday, according to EBS via CQG. The dollar was at Y77.79 from Y78.42, while the euro was at Y110.27 from Y112.01. The U.K. pound was at $1.6320 from $1.6394. The dollar was at CHF0.7548 from CHF0.7675. The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.852 from about 74.598.
While it was U.S. debt that was downgraded on Friday, the dollar retained enough appeal as a relatively stable "safe haven" to attract nervous investors on Monday. Fears of an already fragile U.S. fiscal picture getting worse feeds into existing concern that the U.S. economy could drag down other healthier economies on the globe. With the U.S. debt-ceiling talks and any imminent debt default out of the way, the dollar could again resume its function as a safe-haven currency along with the franc and the yen. Aside from the U.S. currency being backed by the world's largest economy and government debt market, the dollar--recent low-yield and Washington in-fighting aside--has traditionally acted as one of the world's safe-haven currencies based on the fact that it is the world's reserve currency, and the most actively traded currency in the foreign-exchange market.
"Traders are increasingly taking into account a U.S. recession," said Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch in New York. Other safe havens also face the threat of government intervention. Central banks in Japan and Switzerland have both recently attempted to halt their currencies' rise, without much success so far.
On Monday, investors ignored the threat of further Japanese intervention by selling off the dollar by 1% against the yen. Commodity-linked currencies also weakened as the price of oil and stocks continued to fall throughout the day. Both the Australian and New Zealand dollars fell nearly 2% against the U.S. currency.