Foreign Exchange Focus 26-Sep-08

Commentary

The U.S. dollar surged to two-year peaks versus a basket of currencies on Friday as dismal economic data from Europe reinforced
fears of a global recession, adding to a selling frenzy on world stock markets.
The yen soared to multiyear highs versus the dollar and euro on the ensuing risk aversion, while at the low the British pound
suffered its biggest one-day percentage drop against the U.S. currency since September 1992.
Playing into investors' recession fears, data on Friday showed the euro zone's private sector economy shrank this month at its fastest
pace since the monetary union, while the British economy contracted in the third quarter for the first time in 16 years.
"The market is afraid. There are massive, massive redemptions and liquidations going on. As asset values move lower, more margin
calls occur and more assets need to be liquidated for cash," said Greg Salvaggio, vice president of trading at Tempus Consulting in
Washington.
"The dollar is benefiting as global investors are looking for safer investments. The yen clearly is the safest right now. We are seeing
the Swiss franc benefit somewhat and we are seeing the dollar benefiting against Europe."
The ICE Futures U.S. dollar index, a gauge of its value against a basket of six other major currencies, touched a two-year high at
86.965, according to Reuters data. It was last up 2.2 percent at 86.628.
The euro dropped to a two-year low at $1.2498, according to Reuters data. It was last down 3.2 percent at $1.2567. Sterling sank to
a six-year low around $1.5270 and was last down 2.6 percent at $1.5893.
"You are seeing the currencies move as they would in any sort of full-fledged panic. There is complete collapse of carry trade and you
are seeing a flight to quality in U.S. agencies and Treasuries," said Firas Askari, head currency trader at BMO Capital Markets in
Toronto.
"It's a little disconcerting to say the least. Everyone needs to take a deep breath. I think we have to be close to the end of this awful
cycle. It's usually darkest at the bottom."
Worries about a world-wide recession and its impact on company profits savaged global equities, with Tokyo's Nikkei average diving
9.6 percent to a 5-1/2-year closing low. Europe's FTSEurofirst 300 dropped to its lowest since April 2003.
Stocks on Wall Street followed global markets down, with the Dow Jones industrial average plummeting more than 5 percent at one
point before recovering a tad to close down 3.6 percent.
That equities sell-off buoyed the low-yielding Japanese yen as risk-averse investors dumped carry trades. Before the current financial
crisis, investors often borrowed cheaply in yen and channeled the funds to countries offering higher returns.
The dollar fell to a 13-year low of 90.950 yen, according to Reuters data. It was last down 3.3 percent at 94.570 yen. The euro at one
point fell more than 10 percent against the yen to hit a low of 113.82 yen.
The euro zone currency was last down 6.5 percent at 118.82 yen for the session and on track for its biggest monthly percentage loss
on record against the Japanese currency with a loss of 20.6 percent for the month to date at current prices.
The sharp surges in the dollar and yen have raised concerns that financial authorities may act in the currency market to rein in volatile
moves. But some traders are skeptical and reckon central banks would likely prefer more interest rate cuts.
"The currency events are secondary to the more absolute breakdown in trust of the overall financial system. Central banks will probably
want to keep their powder dry. The currencies are reacting to equities and not the other way round," said BMO Capital's Askari.
The Australian dollar dived 8 percent to US$0.6187 while the New Zealand dollar tumbled 6.6 percent to US$0.5571.
"Do we think this trend is long lasting? We don't know. The only thing that is hopeful is the fact that we have the U.S. presidential
election in a week and a half," said Tempus Consulting's Salvaggio. "The prospect of change and a fresh approach might stabilize
the market."
Polls show Democratic candidate Barack Obama leading his Republican opponent John McCain.


Regards
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