FOREX NEWS-Yen extends gains as risk aversion climbs
Mon Jan 21, 2008 7:03am EST
(Changes byline, updates prices, adds quotes)
By Ian Chua
LONDON, Jan 21 (Reuters) - Worries that the fiscal stimulus package worth up to $150 billion floated by President George W. Bush on Friday will not be enough to shore up a U.S. economy that is feared to be either close to, or already in recession fuelled risk aversion.
European stocks slid nearly 4 percent to levels last seen in July 2006, mirroring a 3.9 percent drop in Japan's benchmark Nikkei average .N225.
This came on the back of further declines on Wall Street last Friday. U.S. markets are closed on Monday for the Martin Luther King Jr holiday.
"For now, if we continue to see stock market weakness, the yen will carry on performing relatively well," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank.
At 1126 GMT, the dollar was down nearly 1 percent at 105.75 yen <JPY=> -- levels last seen in May 2005 -- while the euro shed 1.8 percent to five-month lows of 153.18 yen <EURJPY=>.
Against the dollar, the euro was 0.9 percent lower at $1.4484 <EUR=>, slipping below $1.45 for the first time in a month. The dollar climbed 0.6 percent to 76.871 against a basket of currencies .DXY.
"Overall, what you're finding is that the market is short dollars in general, in the G10 world and also emerging markets," Hafeez added.
"Everyone had been selling dollars and buying emerging markets currencies. But with emerging markets weakening as well now, you're finding investors are unwinding those positions and that's leading to dollar demand."
ECB TONE SHIFTS
The euro extended losses from last week, when a European Central Bank official said economic growth in the region could slow more than expected this year, while other central bank board members said inflation remains a key issue.
Futures markets are now discounting more than 50 basis points of easing from the ECB this year, compared with expectations at the start of the month of the bank staying on hold at 4 percent all year.
So far in 2008, growing fears of U.S. weakness spreading to other economies have slammed stocks and supported government bonds and the yen.
Currently, the dollar is getting some benefit from the view other economies and currencies will only weaken in the coming months.
"In our view, the balance of negative economic surprises will shift away from the U.S. and re-coupling will increasingly become the main macro theme of the year," said Dresdner Kleinwort in a client note.
Still, further upside for the dollar might be limited for now with U.S. futures markets still pricing in aggressive easing from the Federal Reserve, starting with either 50 or 75 basis points of cuts next week.
Meanwhile, sterling lost ground after UK property website Rightmove on Monday said annual house price inflation in England and Wales this month hit its lowest since December 2005, adding to the view the British housing market may weaken and hurt the economy.
The pound slipped 0.3 percent to $1.9472 <GBP=>, its lowest since March last year. Against the yen, sterling dropped 1.4 percent to 206.02 yen <GBPJPY=R>, its lowest since May 2006. (Editing by Stephen Nisbet)
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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