The dollar fell on Thursday, sending gold to a record high and yields on Japanese government bonds to eight-month lows, after Moody's warning that the United States may lose its top-notch credit rating spurred a rush towards safe-haven assets.
A standoff in the U.S. Congress over raising the country's debt ceiling while disagreements over a plan to reduce the ballooning deficit prompted the rating agency to place its Aaa rating on review for a possible downgrade for the first time since 1996.
For markets, the stalled U.S. debt talks have added to worries that Europe's sovereign debt crisis was worsening. Meantime, euro zone leaders sought to break an impasse on how and when to grant Greece urgent aid.
The risk of a lower credit rating for the U.S. overshadowed Federal Reserve Chairman Ben Bernanke's suggestion, in testimony to Congress, that the central bank could provide more stimulus if the economy weakens further.
The potential for another round of asset purchases by the Fed, known as quantitative easing, and the Moody's warning added up to a double whammy for the dollar which slid to a four-month low of 78.48 against the yen .
The stronger yen drove demand for Japanese government bonds with the yield on 10-year JGBs dropping below 1.085% to an eight-month low and the benchmark Nikkei stock index down 0.4% as exporters were hit.
Toyota and Sony were both trading 0.9% lower at the midday trading break in Tokyo.
"Moody's move still hasn't been priced in by the markets, so we're seeing the Nikkei tracking losses sustained by S&P futures after the Wall Street close," said Nagayuki Yamagishi, an investment analyst at Mitsubishi UFJ Morgan Stanley Securities.
"Debt ceiling problems are likely to be solved right before the deadline so financial markets, still jittery about euro zone debt woes, are facing an uncertain couple of weeks," he said.
The White House and Congress must forge a deal to raise America's debt limit by August 2 or the government will run out of money to pay its bills and default on some obligations. But they have so far failed due to a sharp divide over taxes.
DOLLAR WOES
The U.S. currency was on the run in Asia hitting a fresh record low against the Swiss franc around 0.8082 francs earlier while the euro rose to $1.4230 after having fallen to as low as $1.3984.
Against a basket of currencies, the dollar was down 0.5% at 74.85 , having tumbled for a high of 76.053.
The Moody's warning has intensified pressure on U.S. lawmakers to scramble together a deal to avert a debt default.
"We believe that the most likely scenario is that the Moody's statement provides motivation for a more serious push to a political compromise and USD selling on this factor may unwind," said Steve Englander, head of G10 foreign exchange strategy at Citigroup.
Gold powered to a fresh record on course for a ninth successive day of gains, matching a similar winning streak in 2006.
Elsewhere in Asia, the MSCI Asia ex-Japan was trading down 0.7% lower with South Korea's KOSPI down 0.9% and Hong Kong's Hang Seng index down 0.8%.
