Dollar drops amid US debt debate impasse

TOKYO, July 25, 2011 (AFP) - The dollar fell to a four-month low against the yen in Asia on Monday, dragged by the impasse in US debt negotiations amid growing fears that the world's biggest economy will default.

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

It recovered to 78.47 yen by 0500 GMT in Tokyo against 78.52 yen in New York late Friday.

The euro edged up to $1.4363 from $1.4357 and to 112.73 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.

The single currency had slipped to $1.4342 after Moody's downgraded its Greece debt rating to Ca from Caa1, before recovering.

The euro is unlikely to get a major lift as there are signs that the eurozone economy is slowing, Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp, told Dow Jones Newswires.

"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.

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.

However, Asian currency markets continue to reflect the expectation "that something will get cobbled together" in the US to avoid defaulting on debt payments, Adrian McGowan, head of FX trading, Asia Pacific at Barclays Capital, said.

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

The dollar was mixed against other Asian currencies, falling to Sg$1.2081 from Sg$1.2094 on Friday, to Tw$28.84 from Tw$28.85 and to 29.80 Thai baht from 29.83.

The unit gained to 1,055.00 South Korean won from 1,050.35 and to 42.46 Philippine pesos from 42.41. It was unchanged at 8,526.75 Indonesian rupiah.

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