Dollar weakens as U.S. debt crisis ends

The dollar was broadly weaker against the other major currencies on Thursday as investors turned their attention to the economic impact of the U.S. debt crisis, overshadowing initial relief which greeted a deal to end the impasse.

During European late morning trade, the dollar was sharply lower against the yen, with USD/JPY dropping 0.72% to 98.03.

The dollar initially hit three-week highs against the yen after the U.S. Congress passed a bill to reopen the government and raise the debt ceiling, just hours ahead of a deadline to avert a debt sovereign debt default.

The deal will fund the government until January 15 and raise the government borrowing limit until February 7. Both sides also agreed to talks over broad budget issues in an attempt to reach a longer-term deal by December 13.

Bu the dollar weakened amid fears over the impact of the government shutdown on the already fragile economic recovery, which could prompt the Federal Reserve to the delay plans for scaling back its stimulus program until at least the start of next year.

The possibility of another debt crisis also loomed, as the temporary solution does not resolve the underlying budgetary issues dividing Republicans and Democrats.

Chinese rating agency Dagong cut its sovereign rating on the U.S. to A- from A on Thursday, fuelling fears that other agencies could follow suit. Fitch placed its triple-A rating on the U.S. on “rating watch negative” earlier this week.

The euro rose to two-week highs against the dollar, with EUR/USDadvancing 0.71% to 1.3631.

Elsewhere, the dollar fell to one-week lows against the pound, withGBP/USD jumping 0.79% to 1.6074.

Sterling extended gains after data released on Thursday showed that retail sales in the U.K. rose at a faster than expected rate in September.

The Office for National Statistics said U.K. retail sales rose 0.6% in September from a month earlier, compared to expectations for a 0.4% increase and were 2.2% higher on a year-over-year basis.

The dollar posted steep losses against the Swiss franc, with USD/CHFtumbling 1.11% to 0.9032.

The greenback was weaker against its Australian, New Zealand and Canadian counterparts, with AUD/USD up 0.56% to 0.9605, NZD/USDadvancing 0.62% to 0.8477 and USD/CAD losing 0.30% to trade at 1.0295.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, dropped 0.72% to 80.00. 

The U.S. was to publish a report on initial jobless claims and the Philly Fed manufacturing index later Thursday.