Markets, dollar drop on U.S. credit warning

North American stock markets and the Canadian dollar recovered some of their losses during Monday's trading but still closed lower as investors reacted to a warning from a credit rating agency that it might downgrade its rating on U.S. government debt.

In Toronto, the S&P/TSX composite index finished down 96.79 points, or 0.7 per cent, at 13,702.33 near the end of trading.

New York markets were also lower, with the Dow Jones industrial average down 140.24 points, or 1.1 per cent, to 12,201.59. The Nasdaq composite index fell 29.27 points, or 1.1 per cent, to 2,735.38 while the S&P 500 index fell 14.54 points, or 1.1 per cent, to 1,305.14.

Standard & Poor's cut its ratings outlook to negative, citing a failure by American lawmakers to tackle the country's deteriorating finances.

The move means the rating agency believes that there's a one-in-three chance it will downgrade the U.S. government's Triple-T rating within the next two years.

That would increase the costs of the government's borrowing.

Standard & Poor's credit analyst Nikola G. Swann noted that "more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures."

Dollar falls

The Canadian dollar lost .45 of a cent to 103.71 cents US.

Commodity prices also fell.

Oil prices headed lower even as Saudi Arabia announced Sunday that it cut daily output to 8.3 million barrels in March from 9.1 million barrels in February because of what it saw as excess global supply.

The move dampened hopes OPEC will soon boost its output to help bring down prices.

The May crude contract on the New York Mercantile Exchange closed down $2.54 at $107.12 US a barrel.

Gold rose to a record, at one point reaching  $1,498.60 US an ounce after the warning, as traders looked for an alternative investment to the dollar.

The June bullion contract in New York closed with a gain of $6.90 to $1,492.90 US an ounce.

Wake-up call

"While it has been widely recognized that the U.S. credit rating may have been at some risk of a downgrade for years, S&P's action still comes as a major wake-up call for policymakers [and investors]," BMO Capital Markets economist Doug Porter said.

"This may well prompt more forceful action on the deficit in the next two years, which in turn will act as a more forceful drag on the economic recovery," Porter said in a commentary.

An actual ratings cut would increase the attractiveness of alternative investments, such as gold or Canadian bonds, which would also push up the value of the loonie.

Porter said a downgrade would have no direct effect on U.S. monetary policy, although it led financial markets lower and hit confidence and private sector spending, but the Federal Reserve might keep interest rate increases on hold even longer than already expected.

"Moreover, if serious budget cuts are brought forward, that would also keep the Fed on hold longer," he said.