US Credit Downgrade: Markets in Heavy Sell Mode

ForexNewsNow | Published on August 8, 2011 at 4:58 am

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Markets entered strong risk-aversion mode after S&P downgraded the US from AAA to AA+ sparking a sell-off in most markets with equity markets slumping globally, commodities crashed and Dollar gained strength against high-yield currencies while weakening against the Yen and the Swiss Franc.

The Fed meets tomorrow on monetary policy after the S&P downgrade which kept the outlook negative as it became less confidence the Congress will end Bush-era tax cuts or tackle entitlements. The S&P also added that the ratings could be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or new fiscal pressures result in higher government debt.

The USDCHF dropped to record low of 0.7485, USDJPY dropped to 77.75 as investors shifted from the Dollar to the Yen and Franc as a measure of safety, EURUSD gained to 1.4432 highs before tomorrow’s Fed meeting and as the ECB signaled its ready to start buying Italian and Spanish bonds to curb the EU’s debt crisis, AUDUSD dropped to 1.0301, NZDUSD dropped to 0.8256 after demand for high-yield currencies reduced drastically. Gold jumped to record high of $1716 after investors flocked to the metal after the US downgrade while Silver continues to weaken trading at lows of $38.33 as commodities decline on slowdown fears.

The ECB said it will “actively implement” its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis. The ECB welcomed Italy and Spain’s efforts to reduce their budget deficits and also called on all EU governments to follow through on the measures agreed at a July 21 summit, including allowing the EFSF to purchase bonds on the secondary market. ECB policy makers were forced to step up their response to the crisis after their failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. The G7 nations sought to head off a collapse in global investor confidence, saying in a joint statement yesterday that they will take every action necessary to stabilize financial markets. Japanese Finance Minister Noda said members agreed to inject liquidity and act against disorderly currency moves should such steps become necessary.

No important calendar events today but focus would be on tomorrow’s Fed meeting and the ongoing issues regarding US downgrade. G20 nations meeting also takes place which could be eventful.

Content provided by: AC Markets

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