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Friday May 22, 2009 - 19:52:00 GMT
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FOREX NEWS-US dollar drops to 2009 low on ratings worries

Fri May 22, 2009 3:12pm EDT

* Dollar under pressure on ratings concerns, risk-taking

* Dollar index drops to 2009 low, euro breaks $1.40

* Focus on U.S. Treasury auctions next week

(Adds details, updates prices)

By Wanfeng Zhou and Vivianne Rodrigues

NEW YORK, May 22 (Reuters) - The U.S. dollar dropped to its lowest level this year on Friday, and was on track for its biggest weekly fall in two months, on growing concerns about the AAA-rating status of the United States.

Investors worried about the U.S. sovereign credit rating after Standard & Poor's said it might cut Britain's AAA rating on Thursday, triggering heavy selling of in U.S. Treasury bonds and the dollar, although U.S. stocks edged up on Friday.

The ratings outlook downgrade of Britain focused attention on soaring fiscal deficits and debt in the United States fueled in part by the unprecedented efforts by the U.S. Treasury and the Federal Reserve to bolster the financial system.

"The fact that the market has seized on these concerns suggests that the impact of the recent monetary and fiscal easing is starting to grow, and certainly that points to a lower dollar moving forward," said Todd Elmer, currency strategist at Citigroup in New York.

A rise in U.S. stocks and more upbeat views of the recession-hit global economy also encouraged risk-taking by investors, helping the euro break above $1.40, while sterling hit a 6 1/2-month peak versus the dollar.

The dollar has come under heavy pressure in recent weeks as growing optimism that the worst of the global economic slump may be past dented safe-haven flows into dollar-denominated assets.

"So far, the market (has been) very much focused on the global recession and ... how quick and strong will the recovery be," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The S&P news "has opened for the dollar a very worrying Pandora's box," he said.

The dollar index .DXY was on track for a 3.6 percent drop this week, the worst week since March. The index has lost more than 5.0 percent so far in May, one of its steepest monthly declines over the last 25 years.

In afternoon trading in New York, the ICE Futures U.S. dollar index .DXY, a gauge of its value against six major currencies, was down 0.6 percent on the day after hitting 79.805, a fresh 2009 low.

The euro was up 0.8 percent at $1.4009 <EUR=>, after hitting a session peak of $1.4050, according to Reuters data, the highest since early January.

However, the United States does not believe that its AAA credit rating will be cut, White House spokesman Robert Gibbs said on Friday. On Thursday Moody's Investors Service on Thursday said it is comfortable with its Aaa sovereign rating on the United States, but the rating was not guaranteed forever. [ID:nN21313143]

Meanwhile, Eurogroup Chairman Jean-Claude Juncker told Reuters on Friday a further rise of the euro could hamper economic recovery in the euro zone, although such a recovery is still some way off. [ID:nLM17854]

TREASURY AUCTION

Some analysts said the market's reaction following the S&P announcement about Britain may be overblown as major industrialized countries will likely see increased fiscal spending across the board.

A test of investor appetite for dollars and dollar assets will come next week when the U.S. Treasury auctions $101 billion of two-, five- and seven-year paper, they said.

"A downgrade of U.S. debt would clearly have a psychological impact on the market, but I do think most industrialized economies are in the same boat," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.

The dollar also fell earlier to a two-month low against the yen after Japanese Finance Minister Kaoru Yosano said on Friday the country is not thinking about intervention in the currency market. [ID:nTFD003303]

The dollar later rebounded and traded 0.4 percent up at 94.81 yen <JPY=> after dipping to 93.86 yen, according to Reuters data.

Sterling continued to rebound after an initial sell-off following S&P's announcement. It was up 0.4 percent at $1.5911 <GBP=D4>, after rising as high as $1.5947, its strongest since early November. The pound was on track for its best weekly performance against the dollar since early February, with a gain of about 4.7 percent.

U.S. financial markets will be closed on Monday for the Memorial Day holiday, while British markets will also be shut for a holiday.

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