The Wall Street Journal-20080122-Dollar Gets Lift on Yen As Risk Worries Spread
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Dollar Gets Lift on Yen As Risk Worries Spread
The dollar had an unusually active day yesterday despite the U.S. holiday -- retreating against the yen but appreciating against the euro and other major currencies on mounting risk aversion and an unwinding of "carry" trades.
In the past, currency activity has been muted when U.S. markets were closed, as they were for Martin Luther King Jr. Day. But retreats in overseas stock markets kept the focus on risk aversion and helped drive the move out of higher-yielding currencies and into the yen and dollar, analysts said.
"It's clear that the plummeting equity markets spilled over into the currency markets in the form of carry-trade unwinding," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
In carry trades, investors borrow in low-yielding currencies such as the yen and reinvest in higher-yielding currencies.
By late afternoon trading, the dollar had fallen to 105.99 yen from 106.68 yen late Friday in New York. The euro was down sharply at 153.13 yen from 155.93, and fell against the dollar to $1.4444 from $1.4617 as the market worried about an economic downturn in Europe.
Elsewhere, the dollar edged up to 1.1091 Swiss francs from 1.0995, while the pound fell markedly to $1.9433 from $1.9544.
"The obvious focus is on equities and that's sparking risk-aversion trades generally around the globe," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
Sharp selling in commodities, which reflected the same concerns about global growth that roiled stock markets, made the session especially challenging for the Australian and New Zealand dollars, Mr. Strauss said.
For the rest of the week, investors will be looking for clarity on the impact of a U.S. economic-stimulus package and awaiting the meeting of the rate-setting Federal Open Market Committee at the end of the month and the Organization of Petroleum Exporting Countries meeting on Feb. 1.
The upshot could be a slightly more confident dollar, said analysts. "Concerns about a global slowdown are encouraging risk aversion and prompting demand for undervalued assets and selling of overvalued assets," said Brown Brothers Harriman analysts.
The Canadian dollar, one of 2007's strongest currencies against the U.S. dollar, is on the decline. Many analysts also include the euro among the world's overvalued assets.
The big driver of market moves likely will be more comments from U.S. officials on an economic-stimulus package, said Robert Fullem, vice president of corporate currency sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.
While the dollar will likely be hurt by the expected trimming in the Fed's benchmark rate at the Jan. 29-30 policy meeting, a strong stimulus package would lift sentiment toward the dollar, Mr. Fullem said. However, "there is not a lot of confidence right now that the implementation is going to be immediate, which is concerning the markets," he said.
The price of oil is another factor weighing on the dollar. President Bush said last week that OPEC will increase oil production to ease price pressure. Lower oil prices would help the dollar.
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Nicholas Hastings contributed to this article.
