U.S. Debt Impasse Weighs on Global Markets

Reuters

Gold soared to a record high for the sixth time in two weeks on Wednesday and the dollar collapsed to another record low against the Swiss franc as investors sought safety from a possible U.S. debt default.

Equities were weaker globally, particularly in Europe.

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The cost of insuring U.S. debt against a default in the next year hit a new all-time high.

Bitterly partisan wrangling in Washington over raising the U.S. debt limit is unnerving investors, who are facing a scenario many thought to be inconceivable -- the United States unable to pay its debts and being downgraded as a borrower.

Republican and Democratic leaders were scrambling to find common ground over deficit cuts with less than a week before the government hits its borrowing limit approved by Congress.

Analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.

A Republican plan, which President Barack Obama was threatening to veto anyway, was sent back to the drawing board after it was found to cut less than advertised.

"Our base scenario is still that some sort of eleventh hour deal will be reached. However, there is always a risk that they do not come to a compromise. The impact would be formidable and the U.S. economy may not be strong enough to take this," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

The impasse has driven investors to seek safe havens for their money, most noticeably gold and the Swiss franc.

Spot gold rose as high as $1,625.24, before easing to around $1,620. It has risen in 16 of this month's 19 trading sessions so far.

The dollar, meanwhile, fell to a fresh record low versus the Swiss franc , with the U.S. currency under broad pressure.

It was at a three-month low against a basket of major currencies .

"(Markets) still believe there will be a positive resolution reached, but I suspect it's not going to be enough to satisfy the ratings agencies," said Joseph Capurso, strategist at Commonwealth Bank in Sydney.

SHARES FALL

World shares as measured by MSCI were flat to slightly weaker, with Europe and Japan providing most of the losses.

The FTSEurofirst 300 was down 0.2 percent for a year-to-date loss of just less than 5 percent. The region's shares have also been hit by worries over the euro zone debt crisis, where there are still strains despite a second Greek bailout plan.

Japan's Nikkei closed down half a percent.

Europe's ongoing pain over the debt in its peripheral economies was on display in bond markets.

Spanish and Italian government bond yields rose after German Finance Minister Wolfgang Schaeuble said Berlin was against a carte blanche for the euro zone's rescue fund to purchase bonds on the secondary market.

Schaeuble's remarks added to investor worries about whether a new Greek bailout plan agreed last week would be enough to stop the spread of contagion to bigger euro zone economies.