The Wall Street Journal-20080116-Dollar Rebounds Against Euro- Strengthening Yen Helps U-S- Currency Despite Sour Data
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Dollar Rebounds Against Euro; Strengthening Yen Helps U.S. Currency Despite Sour Data
Gains for the yen averted a potential euro run to a new high against the dollar yesterday in the wake of exceptionally weak U.S. retail- sales data and large U.S. bank write-downs.
The U.S. currency ended up beating the euro on the day after falling to a seven-week low immediately following the sales report, thanks to pressure on the single currency from the low-yielding yen, which appreciated across the board due to swelling risk aversion.
Banking giant Citigroup Inc. wrote down more than $18 billion and reported a loss of $9.8 billion in the fourth quarter. It is the first of several disappointing financial-earnings reports expected this week. Also, the Commerce Department said retail sales fell 0.4% in December, a key shopping period, sharply more than the expected 0.1% dip.
That fueled a drop in U.S. stock markets, leading short-term currency investors to dump riskier carry-trade bets, when low-yielding currencies are borrowed to buy higher-yielding assets. Among the most common is the yen for the higher-yielding euro.
The dollar was consequently awarded some cross-over support against the single currency.
"Once you get stocks to start tanking along with the bad news about the economy from the weak retail-sales numbers . . . you have people getting out of the carry trade," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago.
Before noon EST, the euro fell to $1.4818 from an intraday high of $1.4923 hit a few hours earlier, not far from its record high of $1.4968 struck Nov. 23. In late-day trading, after U.S. equity markets closed, the euro extended its losses.
The euro fell to a new intraday low of $1.4800 against the dollar and 158.17 against the yen, a four-month low against the yen.
In New York, the euro was at $1.4828 from $1.4871 Monday. The dollar was at 106.83 yen from 108.19. The euro was at 158.40 yen from 160.89. The United Kingdom pound was at $1.9650 from $1.9566, and the dollar was quoted at 1.0917 Swiss francs from 1.0925.
Currency analysts said the data increase the possibility of an aggressive rate cut by the Federal Reserve this month, especially considering the U.S. producer price index that was released at the same time as retail sales. The PPI report revealed that inflationary pressures that might inhibit the Fed from cutting by 75 basis points is almost "non-existent," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.
"If you couple this with news about Citi . . . and add to it this investor anxiety about the overall picture surrounding the U.S. economy, investors start to shun risk, and with that, the yen starts to strengthen," he said.
As for the dollar's weakness against the yen, Lehman Brothers analysts advise investors to count on it.
The dollar fell to a 2 1/2-year low against the yen yesterday.
"Many factors continue to pressure [the dollar] lower," Lehman's David Mozina and John Shin noted. "Perhaps more worrisome is that they represent a broad array of determinants over a wide span of different frequencies: IMM positioning, rate spreads, risk normalization, and long-run valuation metrics."
Thus, the yen is the largest net-long position within Lehman Brothers' Group of 10 model portfolio.
Also out yesterday was a manufacturing survey from the Federal Reserve Bank of New York that showed business conditions in the region held steady, but the gauge of its outlook tumbled to the lowest level in more than six years.
