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posted: 7/26/2011 11:29 AM

Investors selling dollars as debt fracas continues

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Associated Press

NEW YORK -- The dollar slid Tuesday as U.S. politicians remained divided over how to raise the government's ability to borrow, with a key deadline a week away.

The dollar is declining broadly. The euro touched above $1.45 for the first time since July 5, while the dollar fell below 78 yen for the first time since mid-March and struck a record low against the Swiss franc. The U.S. currency may have further to fall. Politicians seem far from agreement as the possibility of a potentially catastrophic default nears.

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"We expect negotiations to continue into the 11th hour, which may suggest further volatility in the coming days," said UBS currency analyst Chris Walker.

The federal government is at risk of default after Aug. 2 if lawmakers haven't agreed on how to raise the debt ceiling. Republicans and Democrats have pitched competing plans. Washington appears to be in gridlock even after President Barack Obama went on national television Monday night, calling for a compromise.

Analysts say a default could send stocks and the dollar plunging and interest rates soaring, further damaging the weak economic recovery. Ratings agencies could downgrade the country's top AAA debt rating if lawmakers don't allow the country to continue borrowing and take steps to cut the long-term deficit.

The dollar has been declining as politicians tussled, down about 3 percent in the past two weeks against a group of six heavily traded currencies. It's at its lowest point since June 7.

Until the standoff over the debt ceiling is resolved, investors are going to cut their dollar holdings in favor of international currencies and the stocks and bonds international currencies can buy, said Michael Woolfolk, a Bank of New York Mellon currency strategist.

A weaker dollar means U.S. exports are less expensive than goods being sold in rival currencies, which gives a boost to big U.S. manufacturing companies. Imports, including gas, get pricier for U.S. consumers already hobbled by stagnant incomes, high unemployment and a distressed housing market.

Also on Tuesday, a trio of reports showed that the U.S. economy was still weak. A report from the Conference Board said consumers remained worried about the economy because of the difficult job market. Home prices were lower in May than they were a year ago, according to the Standard & Poor's/Case-Shiller home-price index, although they rose from April to May. Fewer people bought new homes in June than did in May, according to the Commerce Department.

Still, the dollar could rebound if investors sense that politicians will get a deal done, Woolfolk said.

In midday trading in New York, the euro rose to $1.4502 from $1.4380 late Monday. Earlier on Tuesday, the euro had topped out at $1.4522. The euro is gaining even after Spain and Italy had to pay higher rates in bond auctions Tuesday, suggesting that investors remain nervous about the power of European officials' expanded aid plan to contain the debt crisis. The British pound rose to $1.6390 from $1.6299.

The dollar fell to 78.03 yen, after earlier bottoming at 77.88 yen -- the weakest level since before the world's major central banks had intervened to weaken the yen in March because of its steep rise. The yen, which also is often used as a safe haven, had surged after the Japanese earthquake and tsunami caused investors to cut their risky bets. On Monday the dollar was worth 78.25 yen.

The dollar also fell to its latest record low against the Swiss franc, another traditional safe-haven currency, at 0.7996 Swiss franc. The dollar has dropped about 16 percent against the Swiss franc this year.

Currencies of countries that have higher interest rates than the U.S. does also rose. The Canadian dollar hit its highest level against the U.S. dollar since November 2007. The Australian dollar is close to $1.10, nearing its highest point in 28 years. The Brazilian real was at a 12-year high. Scandinavian currencies gained sharply, up more than 1 percent.

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