FOREX-U.S. dollar gains on safe-haven bid as stocks tumble

Published: February 20, 2009

(Reuters) – The U.S. dollar rose on Friday and was on track for a weekly gain of more than 1.0 percent versus a basket of currencies as worries about ailing banks and the global economy boosted the greenback’s safe-haven appeal.

Stocks on Wall Street were mostly lower, extending a rout which has pulled the Dow Jones industrials to a fresh bear-market low as fears about the fate of major banks escalated.

“Once again the market is taking its cue from global risk factors,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

With world stock prices sharply lower, “the risk aversion mode is on and it’s contributing to a widespread bid for the dollar and the Japanese yen,” he added.

In mid-morning trading in New York, The ICE Futures U.S. dollar index, which tracks the value of the greenback against a basket of six currencies, was up 0.4 percent at 87.774 .DXY. The index gained about 1.4 percent this week.

The dollar has benefited from extreme risk aversion in recent months as investors sought relative safety in dollar-denominated assets such as U.S. Treasuries.

The subdued risk appetite also kept the yen supported, although some traders said the Japanese currency was falling out of favour on the back of a sharp economic contraction and political woes.

The dollar was last little changed at 94.28 yen , while the euro lost 0.3 percent to 119.14 yen .

The Bank of Japan said on Friday that a deterioration in corporate profits had gathered pace and that economic conditions were deteriorating rapidly [ID:nTKG004294].

The dollar briefly erased losses versus the yen after a government report showed a rise in U.S. consumer prices in January, about in line with expectations, but the data’s overall impact on the currency market was limited.

“The market has bigger fish to fry as it contemplates more long weekends as big decisions on the banking sector are confronted,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

“Negative risk is still ultimately seen playing at least mildly U.S. dollar positive.”

The euro pulled back after strong gains in the previous session as concerns over the damage to euro zone banks from a several recession in Eastern Europe persisted.

“The Eastern European scenario that’s playing out is having a negative impact on the euro specifically and it’s having a knock-on effect on the pound as well,” said Tim O’Sullivan, chief dealer at Forex.com in Bedminster, New Jersey. “I think that could be the theme for the next several months.”

The euro was last down 0.2 percent on the day at $1.2638 ., although it recovered from session lows on hopes for a solution to alleviate the euro zone’s problems. It hit a nearly three-month low at $1.2511 on Wednesday.

Germany’s foreign minister said on Friday a process had begun to consider how financially strong euro zone nations could help weaker members of the currency union, though it was too early to say what measures might be taken.

Frank-Walter Steinmeier, who is also vice-chancellor in the ruling coalition, made his comments after a report by Der Spiegel magazine said that the German finance ministry was looking at possible rescue measures for other euro zone states. [ID:nLK150624]

Germany’s finance ministry said the article “does not represent the facts.” [ID:nLK443450] (Additional reporting by Gertrude-Chavez Dreyfuss and Tamawa Desai in London)

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