The Wall Street Journal-20080126-Dollar Gains Against Euro
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Dollar Gains Against Euro
The dollar benefited from a turn in risk sentiment Friday in New York, as uncertainty mounts ahead of the Federal Reserve meeting next week.
The euro fell against the yen and dollar when currency investors took off riskier positions before the close of the week and the Dow Jones Industrial Average fell more than 100 points. Under pressure, the euro yielded to the dollar.
"We are of the firm belief that periods of risk aversion are going to benefit the dollar," said Samarjit Shankar, senior currency strategist at Bank of New York Mellon in Boston.
"The ups and downs of the equity market are having an impact on the foreign-exchange market. It reflects that they're still trying to digest the whole impact of the week's events, and how they're going to set up for the Fed next week," he said.
On Friday afternoon in New York, the euro was at $1.4672, down from $1.4772 late Thursday, while the dollar was at 106.83 yen from 106.88 yen. The euro was at 156.93 yen from 157.88 yen. The British pound was at $1.9817 from $1.9773, while the dollar was at 1.0973 Swiss francs from 1.0862 francs late Thursday.
Questions over how much the Fed will cut the target for its benchmark rate at the conclusion of its two-day monetary-policy meeting Jan. 30 had equity markets shaky Friday. Several banking-and- lending developments played out in the markets, too. For one, Barclay's Capital analysts warned that banks might need to raise $143 billion in additional capital if all the top-rated bond insurers were downgraded significantly.
Rumors about more losses at European financial institutions were rampant as well. That paranoia translated into risk aversion and the euro's fall. The euro fell to an intraday low of 156.55 yen and $1.4660.
"There is uncertainty about how things are going to unfold next week," said Mr. Shankar.
On Tuesday, the Fed announced an emergency 0.75 percentage-point cut to its benchmark rate, bringing it down to 3.5%. Most market watchers expected another significant cut in the coming week, until news emerged that the Fed was unaware that some of the global equity-market turbulence that occurred Monday was tied to an alleged rogue trader at Societe Generale. Now, fed-funds futures contracts are paring back. Odds for a 50 basis-point cut have diminished to 44% from about 76% Thursday.
"There is an unwinding of risky carry trades and a liquidation of assets ahead of the weekend," said Mr. Shankar.
Carry trades are employed during times of higher risk appetite, when low-yielding currencies, like the yen, are borrowed to fund bets in higher-yielding currencies.
Around the same time as risk sentiment turned sharply south Friday, reports emerged about difficulties concerning the passage of a government economic stimulus plan to help the U.S. economy keep out of recession. The package had helped equities rally a day earlier.
