NEW YORK (Reuters) - Fears that the United States could suffer a rating downgrade drove safe-haven gold and the Swiss franc to record highs on Monday, while world stocks slid as deadlocked debt talks in Washington unsettled investors.
U.S. lawmakers were locked in a standoff over dueling debt plans that offered little prospect for compromise, increasing the threat of a downgrade and debt default that could sow chaos in global markets.
Gold rose to record highs above $1,620 an ounce and the U.S. dollar fell to a record low against the Swiss franc.
But both pared gains, while stocks and bonds fell even though many say an agreement will be reached in Washington to increase the $14.3 trillion borrowing ceiling by August 2.
“Where negotiations stand at this point, it’s going to be the 11th hour before they get anything done,” said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson in Seattle.
Also weighing on markets was Moody’s decision to cut Greece’s credit rating further into junk territory. Moody’s said it was almost certain to slap a default tag on Greek debt as a result of a new EU rescue package.
Analysts warned of further sharp selling in stocks and the dollar if Washington fails to increase the debt limit and enters a technical default on its debt next month. Analysts have priced in a roughly 10 percent chance of such a scenario.
Spot gold hit a new peak at $1,622.49 an ounce, while U.S. August gold futures settled up $10.70 at $1,612.20.
Gold is heading toward its biggest monthly gain since April on concerns over euro zone debt levels and the U.S. budget talks. Bullion has gained nearly 8 percent in July, hitting records in five of the past nine sessions.
In currencies, the Swiss franc was the biggest beneficiary of the demand for safe havens, pushing the dollar down nearly 2 percent to an all-time low of 0.8021 franc. The euro fell by the same margin versus the Swiss currency, and against the dollar it fell as low as $1.4323.
Concerns about a U.S. debt default led CME Group (CME.O) to raise margin requirements for trading U.S. Treasury futures. An exchange typically raises margin requirements to discourage excessive risk-taking.
Singapore’s sovereign wealth fund GIC said on Tuesday that it sees a long-term debt problem in the United States, and that it is not simply a question of lifting the borrowing ceiling, according to the Strait Times newspaper.
On Wall Street, the Dow Jones industrial average .DJI closed down 88.36 points, or 0.70 percent, at 12,592.80. The Standard & Poor's 500 Index .SPX fell 7.59 points, or 0.56 percent, at 1,337.43. The Nasdaq Composite Index .IXIC slid 16.03 points, or 0.56 percent, at 2,842.80.
MSCI’s all-country world equity index .MIWO00000PUS fell 0.5 percent.
European shares also slipped, snapping a four-day winning run, with the pan-European FTSEurofirst 300 .FTEU3 closed down 0.4 percent at 1,104.74.
Longer-dated U.S. Treasury yields rose.
The benchmark 10-year U.S. Treasury note was down 12/32 in price to yield 3.01 percent.
London Brent crude for delivery in September fell 73 cents to settle at $117.94 a barrel.
U.S. September crude fell 67 cents to settle at $99.20 a barrel.
Copper futures also sold off, then steadied as the lower dollar and a tight supply outlook helped shield it from concerns about the U.S. debt outlook. Aluminum touched $2,624 a ton, its highest level since June 15.
“We have a situation where if they don’t get an agreement on raising the U.S. debt level, that will be bearish for all assets,” said Robin Bhar, analyst at Credit Agricole. “But bizarrely, the weakening dollar is supporting commodities.”
Reporting by Caroline Valetkevitch, Julie Haviv, Robert Gibbons, Richard Leong and Frank Tangin New York; Brian Gorman in London; Writing by Herbert Lash; Editing by Dan Grebler