Dollar drops amid US debt debate impasse

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TOKYO: The dollar fell to a fresh four-month low against the yen in Asia on Monday, dragged down by the impasse in US debt negotiations amid a growing risk of the world's biggest economy defaulting.

The dollar fell as low as 78.12 yen in early trade, the lowest level since March 17 when the greenback slid to the 76-yen range, prompting intervention from Japan and its G7 counterparts.

It recovered to 78.36 yen by 0220 GMT in Tokyo against 78.52 yen in New York late Friday.

The euro rose to $1.4391 from $1.4357 and to 112.81 yen from 112.69 yen after a new eurozone bailout plan for Greece and other measures were seen to reduce the risk of a flaring-up of the debt crisis.

Attention is now on developments in the US, where Democratic and Republican congressional leaders are divided over how to cut the nation's deficit and raise the debt limit as an August 2 deadline looms.

President Barack Obama met Democratic congressional leaders Sunday, aiming to map a path forward, but no progress was made.

Finance and business leaders have warned that failure to raise the US debt ceiling would send shockwaves through the fragile world economy. Obama has predicted a default would trigger economic "armageddon".

"The dollar met with speculative selling against the yen in thin early trading amid uncertainty over the US debt-limit debate," said Sumino Kamei, senior analyst at the Bank of Tokyo-Mitsubishi UFJ.

"Considering the tremendous impact a US debt default would have on financial markets, the main scenario is that Washington will avert default in the end. But fears persist," Kamei said.

Dollar selling is likely to continue even if an agreement is reached, as this would not fundamentally change the reality of growing US debt, Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp, told.

But the euro is unlikely to get a major lift as there are signs that the eurozone economy is slowing, Uno said.

"While the euro is relatively firmer versus the dollar amid the US debt standoff, its topside is capped by lingering concern over (the) eurozone sovereign debt problem," Kamei said.

Following the yen's rise, Japanese Finance Minister Yoshihiko Noda said he would "continue to closely monitor market movement." (AFP)