The dollar steadied in Asia on Friday after the impact from a Standard and Poor's warning that it could cut U.S. credit ratings was short-lived, and investors bought back the U.S. currency as they shifted their focus to stress tests on European banks.
The ratings agency warned there was a one-in-two chance it could cut U.S. ratings if no deal was reached on raising the government's debt ceiling.
The dollar briefly came under selling pressure, but the impact was short-lived, perhaps because Moody's had already raised the possibility of a downgrade. Dealers said the market might also be hoping that the pressure from the agencies would jolt U.S. lawmakers into doing a deal.
"The impact from S&P's move is very limited. Obviously, it's not great for the dollar, but contrary to what many people think, it's not such a grave development," said Osamu Takashima, chief forex strategist at Citibank in Tokyo.
The euro briefly advanced to $1.4199 , but investors turned wary of bidding up the single currency ahead of the result of Europe-wide stress tests on 90 banks due at 1600 GMT which could force some to seek state aid.
As a result, the euro was holding in a tight range around $1.4169 by late Asian trade, having earlier edged up from an overnight low of $1.4115.
The dollar dipped 0.1% to 0.8153 Swiss francs, not too far from its record low of 0.8080.
The greenback remains 2.5% lower against the Swiss currency for the week, and almost 13% for the year so far, and dealers are betting on further losses.
The dollar inched up 0.1% to 79.20 yen after slipping to a session low of 78.89 shortly after S&P's warning.
Tokyo dealers said the dollar quickly advanced above 79 yen after meeting solid bids from importers and retail investors.
On Thursday, the U.S. currency had fallen to a four-month low of 78.45 yen.
Japanese players were reluctant to sell too actively as Finance Minister Yoshihiko Noda on Friday kept up his verbal intervention in the face of the yen's gains.
U.S. CONCERNS
Still, Japan is unlikely to intervene in currency markets at this point given relatively well-supported Japanese share prices, prospects of a V-shaped economic recovery after the March 11 earthquake and the Bank of Japan's upgrade of its economic outlook, analysts at Nomura Securities said in a research note.
"Forex intervention is generally the last resort after monetary policy has been mobilised, but has failed to prevent the currency from strengthening," the Nomura analysts said.
In addition, the yen is expected to stay buoyant as dollar sentiment was harmed by Fed Chairman Ben Bernanke's comments and uncertainty over debt ceiling in the U.S.
Bernanke reiterated that the Fed would be prepared to inject more stimulus into the system if the U.S. economy worsens after the Fed ended its $600 bln asset-purchase programme, dubbed QE2, last month.
But he told a U.S. Senate committee on Thursday that the time had not come yet and noted inflation had picked up since late 2010.
Wariness over the euro zone's debt crisis is also expected to encourage yen buying, with the market closely watching the outcome of the stress tests on European banks.
"It's difficult to buy the dollar now with credit ratings of U.S. debt under threat of being downgraded. Also, Bernanke's remarks over possible monetary easing is another factor weighing on the dollar although there are many hurdles to actually easing credit further," said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank in Tokyo.
"Dollar/yen in particular will be under bigger downward pressure due to the situation in the United States, as well as Europe's debt crisis. The dollar can recover on short-covering, but basically there is a bigger risk for dollar/yen to go downwards," Kanehira said.
After four straight days of talks, President Barack Obama and congressional leaders were nowhere near an agreement on extending the nation's borrowing authority.
Bernanke said a Treasury default would be "a calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy."
