The Australian dollar jumped to a post-float high above $1.1050 after second quarter inflation figures were higher than forecast, squeezing investors who had recently increased bets that the Australian central bank would cut rates this year.
The Australian dollar and other Asia-Pacific currencies have been rising as traders anticipate more action by policymakers to keep quickening inflation at bay as well as the possibility of more capital inflows heading to the region as investors take refuge from debt crises in the U.S. and Europe.
The threat of a U.S. default and a credit rating downgrade loomed over equity markets and the dollar, which was sold across the board on Tuesday, though a one-notch cut may not have a lasting impact on markets.
The crisis over Washington's borrowing limit has not triggered a broad and lasting selloff in risky assets, especially since many investors see few alternatives to the depth of the U.S. Treasury market and contrast the political nature of the U.S. crisis with the structural problems in the euro zone.
Most market watchers expect some sort of last-minute deal in Washington. But the intense standoff has made investors increasingly hedge against an adverse outcome, particularly with seven days to go before an August 2 deadline when the U.S. Treasury said it would not be able to borrow anymore.
The U.S. dollar index, which gauges its value against a basket of six other major currencies, edged down 0.1 percent to a fresh 2-1/2-month low at 73.42.
The dollar hit a four-month low against the yen, just below 77.80, though the march lower has been sluggish because of fears that Japan may step in unilaterally into markets to slow their currency's gains.
Japanese policymakers are becoming alarmed at persistent yen rises and considering solo currency intervention as an increasingly viable option for the near term, sources with knowledge of the matter told Reuters on Tuesday.
In commodity markets, gold climbed to an all-time high of $1,623.31 an ounce, having risen 14.3 percent so far this year, more than double the S&P 500 index's 6 percent gain so far.
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