Dramatic dollar reverses course

By Peter Garnham

Wild swings in foreign exch-ange markets pushed the dollar to record lows this week before a dramatic turnround as commodity prices tumbled and traders cut back their bets against the beleaguered currency.

The dollar plunged to new lows of $1.5904 against the euro and Sfr0.9637 against the Swiss franc and dropped to a 12-year trough of Y95.77 against the yen on Monday. The falls came after news Bear Stearns, the troubled US investment bank, had been bought by JPMorgan Chase renewed fears over the extent of the damage caused by the credit crisis.

The pound also suffered, falling to a record low of £0.7912 against the euro as currency traders punished the UK's reliance on the embattled financial sector.

The US Federal Reserve responded to growing signs of panic in financial markets by announcing fresh liquidity injections and cutting its Fed funds interest rate by 75 basis points to 2.25 per cent on Tuesday.

The dollar rallied later in the week, however, as prolonged global equity declines triggered a further reduction in risk appetite, prompting speculators to take funds off the table from rallying commodities, with oil and gold prices registering sharp falls.

"Whether it is profit taking in commodities or simply to meet margin calls in tumbling equities, the commodities sell-off is occurring to the benefit of the dollar," said Ashraf Laidi at CMC Markets.

The dollar rallied to stand up 1.4 per cent at $1.5447 against the euro on the week, 1.1 per cent stronger at $1.0085 against the Swiss franc and 1.7 per cent higher at $1.9835 against the pound.

Commodity-linked currencies came under pressure against the dollar, with the Australian dollar falling 3.9 per cent to $0.9013, the Canadian dollar dropping 3.3 per cent to $C1.0230 and the New Zealand dollar losing 2.8 per cent to $0.7911 on the week.

Simon Derrick at Bank of New York Mellon said the apparent cause of the severe pullback seen in the commodity markets appeared to have been part of a general flight to liquidity in the aftermath of Bear Stearns' collapse and rescue.
However, he said it was also possible to see the move as a rational response to the growing prospects of a significant global economic slowdown through the remainder of this year.
Mr Derrick thought that if this were true it could have significant implications for the currency markets. He said: "In particular, given the euro's role as an antiinflationary counter, this suggests that a reversal could develop from here.

"Given how dramatic the run up in euro/dollar proved to be, the risk is that the reversal could prove particularly significant."
The dollar also rose 0.4 per cent to Y99.41 against the yen over the week. But the yen benefited elsewhere, as risk aversion prompted investors to cut back carry trades, in which low-yielding currencies such as the yen are sold to fund the purchase of riskier, higheryielding assets elsewhere.

The yen rose 1.1 per cent to Y153.58 against the euro, 1.8 per cent to Y196.95 against the pound and 3.2 per cent to Y89.46 against the Australian dollar.

Similarly, the low-yielding Swiss franc advanced, rising 0.5 per cent to SFr1.5573 against the euro and 0.9 per cent to SFr1.9995 against the pound on the week.

The pound rallied against the euro on Thursday as an expectation-beating jump in UK retail sales in February weighed on expectations of a near-term cut in UK interest rates.

However, the pound still eased 0.4 per cent to £0.7790 against the euro on the week.

Copright :The Financial Times Limited 2008
Published: March 22 2008 02:00 | Last updated: March 22 2008 02:00

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