Dollar slides after S&P warning on US debt

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TOKYO: The dollar eased against the yen in Asia on Friday after a warning from Standard & Poor's that it was putting the United States on downgrade watch amid the political row over mounting debt.

The greenback fell to 79.06 yen in Tokyo morning trading from 79.13 yen in New York late Thursday, but recovered from a drop to 78.88 at the time of the announcement.

The euro firmed to $1.4176 from $1.4141. The European single currency inched up to 112.09 yen from 111.87 yen.

S&P on Thursday followed a similar move by counterpart Moody's Wednesday by placing the United States on credit watch, warning it might lower the country's triple-A rating because of the political standoff over cutting the deficit.

The threat came as the White House and Republican opponents remained at odds over a long term plan to slash the huge US deficit. The country faces a risk of default if it fails to raise the $14.3 trillion debt ceiling by August 2.

"The political debate about the US' fiscal stance and the related issue of the US government debt ceiling has, in our view, only become more entangled," the rating agency said.

"There is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," it said.

Economists and finance and business leaders have warned that failure to raise the US debt ceiling above the current $14.3 trillion by August 2 could send shockwaves through a world economy still reeling from the 2008 collapse.

Republicans, whose votes Obama needs to raise the congressionally set limit, have demanded sweeping spending cuts in return while rejecting calls from the White House and Democrats to tie them to tax hikes on the rich and corporations.

The greenback had earlier been supported after US Federal Reserve chairman Ben Bernanke hosed down earlier comments that were seen to suggest further monetary easing, telling legislators, "we're not prepared at this point to take further action."

On Wednesday Bernanke seemed to suggest that the Federal Reserve 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.

"The tone of Bernanke's comments were tweaked from what he said the day before," said Sumino Kamei, senior analyst at the Bank of Tokyo-Mitsubishi UFJ.

"We are focusing on upcoming US economic indicators to check the course of inflation rate and the state of the economy," Kamei said.

She added that the euro's resilience against the dollar would be limited as the market awaits the outcome due out later in the day of the European Union's banking "stress tests." (AFP)