US Dollar Suffers from Self-inflicted Debt Squabble

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For the second week in a row the US Dollar was the worst performer among the major currencies. The damage was entirely self-inflicted, the result of an unseemly squabble between the Republicans who want to cut spending and the Democrats who want to raise taxes. In the end the Republicans won, but it wasn’t until a day before the US could have run out of money. Even though the deal has been done, it will do nothing for the US Dollar.

A possible default was therefore avoided but it is possible now that America's AAA credit rating will be downgraded. If the credit rating is or isn’t downgraded, the financial reputation of the United States has been damaged by the whole episode.

Equally as worrying were the weak US GDP figures. Growth in Q1 was downwardly revised to 0.1% and the Q2 figure came in lower than expected at 0.3%. The main contributory factor was a slump in consumer spending, which went up by a just 0.1% in the second quarter. With a background of exceedingly weak performance and the US budget deal, which is going to cut spending by $1.5 trillion, it is not the best environment for growth. Nor has the situation helped the US Dollar.

The US Dollar's next hurdle will be this Friday's employment report. Non-farm payrolls are projected to have risen by between 90,000 and 100,000 in July which isn’t enough cover natural demographic growth. If the figures come out as expected, it will a stark reminder that trillions of US Dollars of stimulus and 31 months of 0% interest rates have achieved virtually nothing in terms of getting people back to work or growing the economy.

Sterling has perked up this week avoiding the negative effect of two weak figures from the Confederation of British Industry last week, probably because investors were too busy giving a collective sigh of relief when the US announced a deal to increase it’s debt ceiling.

On the UK data front, there has been an increase in the number of UK mortgage approvals and, although it was lower than forecast, the first estimate for UK second quarter GDP came out at 0.2%. Although, it was lower than hoped, it was a relief it did not turn out worse.

Overall, it is a welcome reminder that investors are affected by fiscal responsibility and AAA credit ratings, neither of which the Eurozone or US can demonstrate.

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