Forex - Dollar recoups some ground as equities sell-off eases
LONDON (AFX) - The dollar rallied somewhat as the sell-off on the world’s equity markets eased.
The 400 point plus fall in the Dow Jones index yesterday — the biggest since the September 11, 2001 attacks on the US — prompted hefty initial losses across stock markets in Asia and Europe, but they soon steadied. The Dow Jones index is even expected to open 50 points higher later today.
“In early European trade the dollar is gaining ground and for the time being it could well be the fall-out from equity markets that serves to dominate the major pair,” said David Jones, chief markets analyst at CMC Markets.
Whatever happens with equities over the rest of today, investors will be wary of moving into the more risky assets, especially at a time when macroeconomic worries are resurfacing.
“The plunge in equity prices, widening emerging market spreads and safe-harbour buying in US Treasuries reminded market participants that the world can be a risky place and a ‘Goldilocks’ pricing, where everything is ‘just right’ belongs only in fairy tales,” said Michael Carey, senior forex strategist at Calyon.
While yesterday’s shockwaves in the equity markets were rooted in the earlier sell-off in Shanghai, there are other concerns that may stoke a further re-evaluation of the level of risk, analysts said.
Most notably, there is speculation that the rest of this week’s US economic data will paint a relatively downbeat picture of the world’s largest economy, even though yesterday’s US consumer confidence and existing home sales surprised to the upside.
“Anything that reinforces (former US Federal Reserve chairman) Alan Greenspan’s recessionary comments from earlier in the week could easily initiate another round of dollar selling,” said David Jones, chief markets analyst at CMC Markets.
A lot of the worries over the US economy centre around the subprime mortgage market.
Subprime loans are loans made to borrowers who do not qualify for conventional loans. As the economy slows, these will tend to default at a much higher rate than ordinary loans. Talk of trouble in this section of the market is particularly worrying amid ongoing talk of a US housing market slowdown.
“The continued bad news coming out of the subprime mortgage market indicates that the economy is set for a substantial slowdown,” said Ian Stannard, currency strategist at BNP Paribas.
“Making things worse will be the sharp downward revision of US Q4 GDP due to slower net trade and inventories,” he added.
Economic output for the final three months of 2006 is expected to be downgraded to a 2.3 pct annual rate from the 3.5 pct earlier estimated.
The Fed has kept its benchmark rate unchanged at 5.25 pct for four consecutive meetings after previously raising it 17 times in a row. Towards the end of last year, the dollar slumped on mounting talk of an easing in policy following a raft of disappointing activity news.
While the Fed is on hold, the European Central Bank is expected to carry on raising borrowing costs for some months to come which is further helping the euro against the dollar. The ECB is expected to lift its key refi rate a quarter point at least twice again this year to 4.00 pct.
London 0918 GMT Singapore 3.40 pm (0740 GMT)
US dollar
yen 118.32 down from 118.58
sfr 1.2221 up from 1.2204
Euro
usd 1.3193 down from 1.3217
yen 156.16 down from 156.77
sfr 1.6124 down from 1.6134
stg 0.6752 up from 0.6747
Sterling
usd 1.9530 down from 1.9588
yen 231.22 down from 232.30
sfr 2.3878 down from 2.3905
Australian dollar
usd 0.7871 down from 0.7876
stg 0.4030 up from 0.4021
yen 93.18 down from 93.40
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