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Dollar gets trashed as U.S. debt fears deepen

The strongest sign of worry about the U.S. debt drama may be showing up in the dollar, which is on track for its third straight weekly decline.

If you don’t like what’s happening in America, one way to register that is to sell the buck.

The dollar fell to modern-era lows Tuesday against the Swiss franc, the New Zealand dollar and Singaporean dollar, and slid against a host of other currencies as well.

The DXY index (charted below), which tracks the U.S. currency’s value against six major rivals, including the yen and the euro, fell 0.7% to 73.52, nearing the 2011 closing low of 72.93 reached April 29.

Dxy726 The DXY is down 7% year to date.

Democrats and Republicans in Washington haven’t agreed on a plan to raise the $14.3-trillion federal debt ceiling ahead of the Aug. 2 deadline set by the U.S. Treasury. Without a higher ceiling by next week’s deadline, the Treasury says it risks defaulting on debt payments or other obligations.

Although many on Wall Street say they don’t believe Congress will allow default -- “I can’t believe they’re that dumb” is a common refrain from market players -- a greater concern is what will happen with the nation’s AAA credit rating.

Standard & Poor’s has warned that it may lower America’s rating if Congress and the White House don’t agree on at least $4 trillion in long-term budget cuts. Moody's Investors Service also has threatened a ratings cut.

Uncertain what a lower rating might mean for markets, “Global investors are preferring to reduce their exposure to the dollar temporarily,” said Michael Woolfolk, currency strategist at Bank of New York Mellon. “For the time being, everything points to further dollar weakness,” he said.

As the U.S. currency sinks it’s eroding Americans’ purchasing power (good luck traveling overseas this summer), but it’s also helping U.S. businesses by making their exports cheaper.

Besides the debt drama, the greenback’s value is under pressure from concerns about the struggling U.S. economy, as the unemployment rate sits at 9.2% and job creation is abysmal.

Given slow growth, the Federal Reserve is expected to keep short-term interest rates near zero indefinitely.That also undermines the dollar, especially compared with currencies of developing nations that have been been tightening credit.

Case in point: Brazil. One dollar now buys just 1.54 Brazilian reals, down 7.3% since the start of the year and the fewest since the late-1990s.

The dollar also is slumping against its major rivals, including the euro and the yen. Although Europe's own debt crisis continues to fester, the euro rose to $1.451 on Tuesday, up from $1.437 on Monday and a three-week high.

The buck now buys just 0.801 Swiss francs, a record low and down 14.3% this year. Switzerland’s currency is considered a haven in times of geopolitical turmoil, not unlike gold, which hit a new high of $1,616.60 an ounce Tuesday.

In Japan, the falling dollar is bringing howls from manufacturers. As the yen rises, they face the choice of raising prices of their exports to the U.S. or slashing their profit margins.

One dollar now is worth 77.89 yen, down from 81.05 three weeks ago and the weakest since the yen briefly strengthened to a postwar record of 76.25 after Japan’s massive earthquake in March.

-- Tom Petruno

RELATED:

GOP seeks to build support for Boehner debt plan

Two proposals, but no clear path to debt-ceiling deal

California gets $5.4 billion loan from banks to bypass U.S. debt drama

 
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