NZ$ rises to 88.42 USc after Obama announces US$1 trln deal to raise debt ceiling; US dollar weakens as credit rating downgrade fears remain

The New Zealand dollar sprinted to a fresh post-float record high of 88.42 USc in early afternoon trade after US President Barack Obama announced a deal to cut the US budget deficit and raise the US debt ceiling.

Obama said it would allow America to avoid default on its US$14.3 trillion debt.

See more here at Bloomberg.

Obama announced a deal with US$1 trillion of spending cuts over 10 years. However it was less than the US$4 trillion that ratings agencies said was needed to avoid a downgrade in America's AAA credit rating and does not include tax hikes.

This is keeping the US dollar weak against some currencies.

The deal has been agreed by Republican and Democratic leaders, but still needs the votes on the floor of the Congress from rebellious new Tea Party Republicans.

Weak US economic growth has triggered fresh talk  in recent days that the Federal Reserve would have to restart printing money to fire up the economy.

The deal appears to postpone bigger cuts in spending and tax increases for

This would also weaken the US dollar.

The NZ dollar edged back from its highs in mid-afternoon trade as markets digested the deal.

Here's details the deal via Bloomberg.

Congressional leaders are sifting through the details of the tentative bipartisan agreement to raise the debt ceiling by $2.1 trillion, sufficient to serve the nation’s needs into 2013.

They are preparing to sell to members the deal to cut $917 billion in spending over a decade, raising the debt limit initially by $900 billion, and to charge a special committee with finding another $1.5 trillion in deficit savings by the year’s end. They confront an Aug. 2 deadline for approval.

Obama made the announcement at the White House press room early this afternoon New Zealand time. 

"There are still some very important votes to be taken by members of Congress, but I want to announce that the leaders of both parties, and both chambers, have reached an agreement that will reduce the deficit and avoid default - a default that would have had a devastating effect on our economy," Obama said. 

"The first part of this agreement will cut about one trillion dollars in spending over the next ten years," he said. 

"The result would be the lowest level of annual domestic spending since Dwight Eisenhower was President, but at a level that still allows us to make job-creating investments in things like education and research. 

"We also made sure that these cuts wouldn't happen so abruptly that they'd be a drag on a fragile economy," Obama said.

Relief...for now

Analysts said immediately after the deal it failed to fix America's longer term debt problems and left it vulnerable to a credit rating downgrade, although a relief rally in the short term may boost the appetite for riskier assets in the short term.

See more here at Reuters.

IRA JERSEY, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK

"It's not dissimilar to the Boehner plan, I think it has a reasonably good chance of passing the House. It's a little light on cuts, so the risk of downgrade is still a little high. That's the next market moving headline you could see. Our thinking is it needs $3 trillion in cuts to avoid a downgrade by S&P so there is still a high probability of a downgrade, but this will avoid a fiscal shock.

"Risky assets are likely to do pretty well, but that may be temporary. At the end of the day this brings back the need to focus on fundamentals, Europe still has problems and in the US growth momentum is still poor. We would be better buyers of dips in rates."

(Updated with more details)