Dollar bruised and FTSE flat amid mounting US debt fears

Britain’s FTSE 100 flatlined and the dollar fell on Tuesday as lawmakers in Washington battled over competing plans to cut spending and raise the US debt limit, just one week before a possible federal default.

The dollar index – which tracks the greenback’s performance against a basket of currencies – gave up 0.62% to hit a seven-week low of 73.61. Sterling hardened 0.68% to $1.629 and the euro took on 0.8% to $1.449.

Nonetheless, the yields, or implied interest rates, on benchmark 10-year US treasury notes slid eight basis points to 2.96% from a day high of 3.04%, signalling that bond investors thought a default was highly unlikely.

Christine Lagarde, the new head of the International Monetary Fund, earlier warned that the ‘clock is ticking’ on a deal to lift the US deficit debt ceiling from $14.3 trillion to $15.3 trillion, amid fears that failure to reach an agreement could trigger a fresh economic crisis.

Meanwhile, the FTSE 100 index of blue-chip shares edged up 0.08%, or five points, to 5,930 and the Mid-250 index edged 0.02%, or three points, higher to 11,789.

Joshua Raymond at City Index said the tight range in which the FTSE 100 had moved pointed to the strange position 'that traders find themselves in, with higher metal prices enticing some investors to pick up' mining stocks whilst the debt crisis makes them extremely cautious.’

He added: ‘All eyes are firmly on the US and until we get a resolution in the negotiations there to raise the US debt ceiling, investors are finding it hard to justify adding too much risk to their portfolios.’

Most Wall street stock indices fell as the debt limit talks and weak housing data offset a better-than-expected report on US consumer confidence.

The Dow Jones Industrial Average slipped 0.52% to 12,527 and the Standard & Poor's 500 weakened 0.77% to 1,284, although the Nasdaq Composite inched up 0.02% to 2,844.

The Conference Board, a business group, said its consumer-confidence index increased to 59.5 in July, from 57.6 a month earlier. Economists had expected a drop to 56, according to a Reuters poll.

‘We had been warning of a potentially awful figure based on the steep drop seen in the preliminary reading of University of Michigan sentiment,’ said James Knightly, economist at ING, referring to another survey of consumer morale.

‘Not much has changed over the last ten days, aside from the intensification of concerns about the potential for a US debt default or downgrade, which we would have felt would be a negative for sentiment,’ he added. ‘This makes discerning the near-term outlook for spending fairly difficult, but it may be made easier if the UoM [Michigan] reading gets revised upwards on Friday.’