NEW YORK Stock futures and the dollar fell late Wednesday after Moody's Investors Service warned the United States may lose its prized AAA credit rating, reversing a rally on Wall Street.
The credit ratings agency cited the growing risk that Washington could fail to raise its $14.3 trillion government debt limit "on a timely basis.
Government debt prices also fell. Benchmark 10-year Treasury notes slid 8/32 in price to yield 2.91 percent, while the dollar tumbled against most major currencies and set another record low against the Swiss franc as Thursday's Asian trading session opened.
The dollar fell as low as 0.8140 Swiss franc on electronic trading platform EBS. S&P 500 futures initially lost about 11 points on the news to about 1,302 before recovering a bit to 1,306, down 5.10 points from Wednesday's close.
"They've been threatening to do it for the last 60 days," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia. "What has been beginning to spook Moody's and some other people is that Congress may be dumb enough to actually default on the debt."
Investors have not fully appreciated the seriousness of a potential credit downgrade, as most have expected an agreement to be reached in Washington, said Troy Buckner, managing principal at NuWave Investment Management in Parsippany, New Jersey.
"This would likely be a game-changer over the very short run and could cause large market dislocations very quickly," Buckner said.
Some still held out for President Barack Obama and Congress to broker a deal despite political brinksmanship and an attitude toward default that is too cavalier, said David Joy, chief market strategist at Ameriprise Financial in Boston.
Moody's announcement came after global stocks and the euro had rallied following three days of losses. Risk assets were spurred after Federal Reserve Chairman Ben Bernanke, in testimony to Congress, suggested the U.S. central bank could provide more stimulus if the economic recovery in the United States falters.
Commodities also climbed, and gold had jumped to a record near $1,590 an ounce.
Bernanke said the Fed was ready to ease monetary policy further if the economy weakens and inflation moves lower.
The Fed ended its most recent asset-purchase program in June. Traders said another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.
The Fed's "easy money" policies since 2008 have helped bolster stocks. The Standard & Poor's 500 index .SPX has almost doubled since it touched a decade low in March 2009.
(Reporting by Herbert Lash; Editing by Leslie Adler)