More misery for financial markets as the US debt ceiling/spending cuts brawls remains unresolved.

Markets in Asia, Europe and the US were sold down for a second day in the past three on these fears.

Gold rose, then fell, the US dollar fell, then rose in late trading in the US.

The Australian dollar soared to new 28-year highs yesterday and closed in on the $US1.11 level, thanks to the toxic combination of the US debt fears and the higher than expected Consumer Price inflation figures for the June quarter (see separate story).

The Aussie finished trading in Asia yesterday above $US1.1070 after poor inflation figures.

The Aussie was trading at $US109.60 just prior to when the inflation figures were released at 11.30 am. It then jumped quickly rose to $US110.62, eased and then rose again to a new 28 year high of $US110.73 around 5 pm yesterday in Sydney.

It hit $US1.1080 offshore during the night, fell back to end around $US1.1010 as the US currency bounced, then recovered to $US1.1030 around 7.30 am today.

Gold hit an intra-day high of $US1628 an ounce offshore, but retreated on the rise in the dollar to end around $US1615 an ounce.

The Trade Weighted Index rose to 78.8, still under the all time high hit in May of 79.2.

The yen continued to rise yesterday, briefly climbing to 77.78 against the dollar, the highest level since March 17, when the Japanese currency hit a record high of 76.25.

Wall Street fell for the fourth day in a row as the debt ceiling drama deepened.

The Dow lost nearly 200 points, or 1.6%, the S&P 500 slumped a nasty 2%, Nasdaq, the star performer in recent weeks, shed 2.6%.

Those falls were after big falls across Europe earlier in the trading day.

Japan's Nikkei Stock Average fell 0.5% amid strong levels for the yen, while Australia's closed down 0.8% after the higher CPI figures boosted the value of the Aussie dollar.

Hong Kong's Hang Seng Index fell 0.2%.

But Shanghai's Composite index rose 0.7% and South Korea's Kospi turned around in the session to gain 0.2% after reasonable second quarter economic growth of 0.8% was reported yesterday.

That was a touch less than the local South Korean market had expected.

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The Share Price Index futures contract slumped 67 points in overnight trading in Australia and the US, pointing to a big fall when trading starts here this morning.

With a week to go before the US hits the August 2 deadline to raise the $US14.3 trillion ($A13.1 trillion) borrowing limit, President Barack Obama and Democrat and Republican politicians remain deeply divided on a resolution.

The Aussie dollar reached parity (100 USc) on October 15 of last year, the first time its hit that level with the greenback since it was floated 28 years ago.

Australia's current cash rate is 4.75% and some experts are expecting the central bank to increase it to 5% by the end of the year, if not sooner.

Normally rates would have risen in May, but the RBA held back because of the weakening domestic economy and easing pressures in the labour market.

At the close yesterday, the ASX 200 index was down 35.9 points, or 0.8%, at 4537.4, reversing Tuesday's gains, while the All Ordinaries index dropped 33.7 points, or 0.7%, to 4612.6.

The market will fall today and continue to be weak while the uncertainty from the US continues.

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

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