Thursday, Dec 25, 2008

(This item was originally published Wednesday.) 


 
   By Nicholas Hastings 
   A DOW JONES NEWSWIRES COLUMN

LONDON (Dow Jones)--A low appetite for risk will ensure that the dollar starts higher in 2009.

Later on, the U.S. currency could well suffer from its new low-yielding status as investors use it to fund high-yielding assets elsewhere.

For now, however, as the global economy continues to slow, as the outlook for monetary policy remains uncertain and as levels of global liquidity stay low, the dollar will find support as a safe haven.

Evidence of this support was already available in the results of this week's U.S. Treasury auctions at which the bid-to-cover ratios may have only been a moderate 2.1, but they still pointed to a healthy overseas appetite for U.S. government paper despite all the concerns about the country's ballooning budget deficit.

"If the U.S. manages to complete its funding operations without incident and also avoid unwelcome surprises on the corporate front, the greenback will manage to enter 2009 on solid footing," said Geoffrey Yu, a senior currency strategist with UBS AG in Zurich.

In the closing weeks of 2008, the dollar has come under renewed selling pressure as global risk appetite has improved a little and equities have staged a year-end rally after many major central banks around the world slashed interest rates to nearly zero while their governments promised increased funding to help stave off a prolonged recession.

But 2009 will more than likely bring a fresh avalanche of bad news that will work in the dollar's favor.

"The new year could see sharp readjustments in earnings expectations," said the currency strategy team at BNP Paribas SA in their year-end outlook.

At the same time, they added, a poor economic outlook will bring "risk aversion back into focus."

For example, news at the end of 2008 that the Bush Administration finally agreed to a bailout for the U.S. auto industry may have raised risk appetite and hurt the dollar.

Come next year, however, the market more than likely will fret that the bailout will only last three months, leaving plenty of scope for unemployment to grow even more.

Not only will this sort of development reduce risk appetite and so help the dollar, but it will also highlight the fact that while the U.S. economy is deteriorating now, there is a risk that other major economies will deteriorate even further later on, making the U.S. currency a more attractive bet.

How long this risk aversion lasts - and helps the dollar - is a moot point.

At some stage, many analysts expect risk appetite to recover and investor interest in the safe haven of U.S. Treasurys to fade.

Steve Barrow, currency strategist with Standard Bank in London, reckons that in October alone overseas buyers parked three times as much money in Treasury bills than they have in any full year on record as global appetite for risk declined.

"When risk returns, and the parking lot empties, the dollar will slump," he said.

For the time being, though, chances are that Treasurys will remain the parking lot of choice, ensuring that the dollar starts the new year heading higher.

Early Wednesday, as trading wound down ahead of the holidays, the dollar was mixed, with higher risk aversion pushing it lower against the yen but allowing small gains against the euro.

News Tuesday that existing home sales in the U.S. tumbled by an unexpectedly large 8.2% last month helped to knock 1.2% off the Dow Jones Industrial Average and 2.4% from the Nikkei.

By 0805 GMT, the dollar was down at Y90.39 from Y90.88 late Tuesday in New York, according to EBS. The euro is down at $1.3961 from $1.3972 and at Y126.24 from Y126.91.

Bloomberg TNI FRX POV 


   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 15 years. Apart from his written commentary and analysis, he also appears on CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)

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This is the last Forex Focus for 2008. The column resumes Jan. 5, 2009.

(END) Dow Jones Newswires

25-12-08 0542GMT