Swiss franc hits new highs on debt, growth woes

Varoius Euro banknotes lay next to various Swiss Franc notes in this picture illustration at a bank in Warsaw, July 18, 2011.

NEW YORK (Reuters) - The safe-haven Swiss franc soared to record highs against the dollar and euro on Tuesday, with more gains likely as investors fretted about sluggish global growth and debt loads in the United States and Europe.

While Congress buried the specter of a U.S. debt default by passing a deficit-cutting package, concerns lingered of a possible downgrade of the top-notch American credit rating despite soothing comments from Fitch.

"The combination of the two worst storms -- retreating fundamentals and the fears going around in both the United States and Europe -- is going to put a lot of volatility in the market," said Jonathan Xiong, managing director and global investment strategist at Mellon Capital Management.

"If the crisis goes on, the Swiss franc will continue to be seen as a safe haven," he said. Xiong is part of a team that oversees $30 billion in assets in San Francisco.

New evidence the U.S. economy has hit a rough patch emerged in a report showing consumer spending fell in June for the first time in nearly two years, a day after data showed sluggish U.S. and global manufacturing.

In Europe, Italy and Spain came under increased pressure as investors fear the euro zone's bailout fund is too small if the debt crisis spreads to larger economies. Italian bond yields soared to a 14-year high.

The dollar fell as low as 0.76425 Swiss francs, its seventh straight intraday record low, and was last down 2.3 percent at 0.7654 franc. Support levels are few and far between, with chartists at Barclays highlighting a 33-year trendline which comes in around 0.7580.

The euro lost 2.7 percent to 1.0873 Swiss francs, after having hit a low of 1.08451.

DOWNGRADE RISK

Most analysts say a ratings cut has been largely priced into financial market and therefore, any reaction in the dollar would likely be limited should a downgrade occur.

Fitch Ratings said the agreement to raise the U.S. borrowing capacity means the risk of a sovereign default is "extremely low" and commensurate with a AAA rating.

Bill Gross, co-chief investment officer at Pacific Investment Management Co in Newport Beach, California, said that until Washington has a more balanced approach to the budget that includes both spending cuts and revenue raising as well as programs that focus on job creation, the dreaded ratings agency downgrade "is in our immediate future".

"This agreement, more than anything, seals the fate of the dollar -- it is headed downward."

The growth implications of the budget deal also do not bode well for the U.S. currency, fund managers said.

"It's going to slow down economic growth. It also brings in future uncertainty because we don't know how much is going to be done and what regulations will be enacted," Mellon Capital's Xiong said. "The uncertainty is causing everybody to postpone their consumption and spending."

And steps to reclaim a top-notch rating would also drag on growth, said Christopher Sebald, chief investment officer of Advantus Capital Management in St. Paul, Minnesota. "A downgrade is bad for the dollar because slower growth will keep rates low for a longer period." Sebald oversees $22 billion.

But if the markets are starting to price in "global recessionary concern," the dollar could actually rally as Treasuries get a flight to quality bid, said Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill Lynch Global Research in New York.

The euro was last down 0.3 percent at $1.4202 after slumping to $1.4151, its weakest since July 21.

The dollar slipped 0.1 percent to 77.13. It was not far from a four-month low of 76.29 yen hit on Monday on EBS, just shy of its trough of 76.25 set in March which triggered coordinated intervention by major central banks.

The yen's strength drew warnings from Japanese officials of possible action to stem its rise and nudged the Bank of Japan closer to a further easing in monetary policy.

(Additional reporting by Julie Haviv; Editing by Andrew Hay)