Dollar falls more as Moody’s threatens U.S. rating

SAN FRANCISCO (MarketWatch) — The dollar extended losses Tuesday, with the currency’s benchmark index on track for its lowest finish since early May, after Moody’s Investors Service said the U.S. runs the risk of losing its triple-A rating by next year.

The Moody’s news puts more pressure on the Federal Reserve, which is already expected by many investors and market observers to announce further quantitative easing as soon as this week.

”A fiscal cliff and another downgrade [are] not dollar positive,” said Kathleen Brooks, research director at Forex.com. “To make up for the government’s fiscal malaise the Fed might ‘have’ to do QE as early as this week.”

The ICE dollar index DXY -0.65% , a gauge of the greenback’s moves against six other major currencies, fell to 79.862, down from 80.408 late Monday. The index hasn’t closed below 80 since early May, according to data from FactSet.

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The euro EURUSD +0.76% climbed to $1.2860 from $1.2764.

Moody’s said to keep the country’s triple-A rating, Congress must take some constructive action on the federal debt. The rating stands at Aaa with an outlook of “negative.” Read more on Moody’s.

Traders also remained cautious ahead of a decision by Germany’s top court on the euro-zone permanent rescue fund.

And the Federal Open Market Committee, the Fed’s policy-making arm, is due to announce its policy decision Thursday after a two-day meeting.

“The warning shot fired by Moody’s Investor Services has ... dampened the outlook for the USD as the government remains reluctant to address the ‘fiscal cliff,’ but we may see the FOMC interest-rate decision prop up the greenback, should the central bank refrain from expanding its balance sheet further,” said David Song, currency analyst at DailyFX.com.

In economic news, the Commerce Department early Tuesday reported that the U.S. trade deficit widened slightly in July but came in below the consensus forecast of Wall Street economists. Read more on the trade gap.

“July’s trade figures are nowhere near as good as they look at first sight, as they mask a significant deterioration in export growth to the euro zone,” said Paul Dales, senior U.S. economist at Capital Economics, in a note. “What’s more, the full impact on the U.S. economy from the overseas slowdown has yet to be felt.”

Euro strengthens

Also drawing attention was Wednesday’s expected ruling by Germany’s constitutional court on the legal challenges to the country’s participation in the European Stability Mechanism — the euro zone’s permanent bailout fund.

The court on Tuesday confirmed it would proceed with its ruling the following day, despite a new challenge filed late last week that had led to speculation the decision could be delayed. Read more on Germany's top court .

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“We are seeing ‘risk’ rally not so much on the hope the Constitutional Court will rule that changes to the ESM are legal, as on the prospect that they will reach a conclusion one way or the other,” said Kit Juckes, head of foreign exchange at Société Générale, in a note to clients.

The rise in the euro above $1.2841 “could open the way for a spike to $1.30, where we would like to sell the euro,” he wrote.

Among assets that improve when investors feel comfortable moving away from safe havens like the dollar, the S&P 500 Index SPX +0.31%  rose 0.4% in Tuesday’s trading as oil futures moved higher to the $97-a-barrel level. Read about U.S. stocks. See story on oil futures.

Among other major currency pairs, the British pound GBPUSD +0.51% fetched $1.6067, up from $1.5995 in the U.S. on Monday.

Against the Japanese yen, the dollar USDJPY -0.69% declined to ¥77.79, down from ¥78.31.

The Australian dollar AUDUSD +0.92% traded at $1.0444, up from $1.0336.