Tuesday, Jan 20, 2009
(Update with Bank of Canada rate cut, fresh prices and analyst quotes)
By Riva Froymovich
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The dollar advanced sharply versus the euro and U.K. pound Tuesday on economic fears across Europe and as U.S. stocks sank.
A U.K. banking sector bailout package, another ratings downgrade in the euro zone, negative headlines out of the Eurogroup meeting of finance ministers and lower equities all led traders to seek safety in the U.S. dollar.
The "dollar is the one that benefits from a lack of confidence (even when this is U.S. based)," said Tyson Wright, a senior foreign exchange trader at Custom House in Victoria, B.C.
The euro fell below $1.29 Tuesday, to a six-week low of $1.2855.
The U.K. pound fell 4.1% from a session high of $1.4440 to its lowest level in seven-and-a-half years, $1.3865.
Credit Suisse analysts say the pound is unlikely to experience a correction, as fair value measures for the currency "may begin to erode amid significant structural changes to the economy."
The U.K. Treasury's financial rescue package, announced Monday as the Royal Bank of Scotland warned of losses up to $40 billion in 2008, has so far failed to persuade investors that the worst is over for the U.K. Bank shares continued to fall Tuesday, with Royal Bank of Scotland losing 66.5%, despite the U.K. government's stake in the bank rising to 70% under the new program, and Barclays PLC down 10%.
However, the Japanese yen, considered a relatively safer asset, gained against the dollar and euro as the Dow Jones Industrial Average plunged down more than 300 points.
Low stocks indicate low risk appetite, usually accompanied by the selling of riskier assets.
The dollar fell as low as Y89.68 Tuesday, while the euro declined to Y115.52, a 12-week low.
Tuesday afternoon, the euro was at $1.2900 from $1.3125 late Monday, while the dollar was at Y89.71 from Y90.61, according to EBS. The euro was at Y115.72 from Y119.01. The U.K. pound was at $1.3932 from $1.4502, and the dollar was at CHF1.1470 from CHF1.1311 late Monday.
The European Commission slashed growth forecasts across Europe Monday. In comments Tuesday, members of the Economic and Financial Affairs Council expounded their concerns.
European Central Bank Governing Council member Ewald Nowotny recently called the European growth forecasts "a shock."
German Finance Minister Peer Steinbrueck said the current economic recession can't be prevented, but must be contained.
The euro was under additional pressure after ratings agency Standard & Poor's Monday cut its sovereign-debt rating for Spain to AA+ from AAA, citing the country's weak economic growth, large current account deficit and rapidly deteriorating public accounts.
Meanwhile, the greenback also rose against the Canadian dollar after the Bank of Canada reduced its key policy rate by 50 basis points to the lowest on record.
The BOC signaled it was prepared to cut rates further to combat a recession that will cause the economy to contract this year for the first time since 1991 as domestic demand shrinks and exports decline.
"The rate cut is not the main driver of the Canadian dollar but a small event risk in a sea of negative global economic and financial news that will continue to support the U.S. dollar," said Brown Brothers Harriman analysts, eyeing C$1.30 as the next key target.
Tuesday afternoon, the dollar was at C$1.2660, off an intraday high of C$1.2699, from C$1.2511 late Monday.
Elsewhere, the Hungarian currency weakened Tuesday to a record low against the euro, due to rising global risk aversion toward emerging-market currencies, poor Hungarian economic prospects and central bank tolerance of a weaker forint. The euro gained to HUF288.35. The forint has weakened some 10.5% against the euro from the start of the year.
-By Riva Froymovich, Dow Jones Newswires; 201 938-5063; riva.froymovich@dowjones.com
(Margit Feher in Budapest contributed to this report.)
(END) Dow Jones Newswires
January 20, 2009 16:53 ET (21:53 GMT)
