Eurozone to temper dollar drop

The dollar may fall and US Treasury yields rise today in response to the United States losing its top-tier credit rating from Standard and Poor's but any selling is likely to be tempered by the Eurozone's escalating debt crisis. Equity markets' likely reaction was indicated by a drop of more than six per cent yesterday in Tel Aviv stocks, one of the first to open globally after S&P on Friday cut the US long-term credit rating by a notch to AA-plus from AAA. Investors will be all the more likely to withdraw to safe havens, such as the Swiss franc, the yen and gold, if Eurozone officials cannot stem concern that their debt crisis risks engulfing Italy, the bloc's third largest economy, whose government bond yields have soared to 14-year highs. "The real effects of this [US credit rating downgrade] will take time to show through but a weaker US dollar and marginally higher yields are likely," said Charles Diebel, a strategist at Lloyds Bank. Article continues below "The irony here is that in the context of the price action last week, the equity market response could be quite negative and thereby we may actually see US Treasuries supported by safe-haven flows," he said in a note. Worries of another US recession and concern about the Eurozone crisis have already sparked a global stock market slump that wiped $2.5 trillion (Dh9.18 trillion) off company values in the past week. The fall in global share prices, as measured by the MSCI All-country World Index, was the biggest weekly decline since early October 2008, according to Thomson Reuters Datastream. Consumer discretionary shares of firms dependent on external demand are likely to be singled out for more punishment. On Friday, yields on benchmark US ten-year treasury notes were about half a percentage point away from the record lows of near two per cent which were hit during the throes of the global financial crisis.