Monday June 2, 2008 - 20:56:37 GMT
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Reuters - www.reuters.com
FOREX NEWS-Yen rallies as S&P cuts US financial firms ratings
(Recasts; updates prices, changes byline)
* Yen, Swiss franc rallies as risk aversion rises
* S&P cuts ratings of three major U.S. securities firms
* A British lender warns on UK mortgage market
* U.S. ISM index higher-than-forecast in May
By Lucia Mutikani
NEW YORK, June 2 (Reuters) - The yen surged on Monday after
Standard & Poor's cut ratings on three big U.S. securities
firms and a British lender gave a grim assessment of the UK
mortgage market, igniting fears of more pain from the global
The market saw investors bailing out of risky trades,
positioning the yen for its largest daily gain against the U.S.
dollar in nine weeks, while sterling fell across the board.
Standard & Poor's downgraded ratings on Lehman Brothers Inc
(LEH.N: Quote, Profile, Research), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research) and Morgan Stanley
(MS.N: Quote, Profile, Research) and said the outlooks on the large financial
institutions sector were now predominantly negative. For more,
Bradford & Bingley (BB.L: Quote, Profile, Research) earlier painted a bleak picture
of the UK mortgage market, saying the risk of customers
defaulting on loans was rising faster than expected as it
slashed the price of its emergency rights issue to secure a
private equity lifeline, hitting European bank shares.
"Risk aversion is back. The fear of consumer bankruptcies
and much bigger problems in the financial sector in the highly
leveraged economies like the U.S. and the UK are weighing on
carry trades," said Boris Schlossberg, senior currency
strategist at DailyFX.com in New York.
"That's the theme dominating trade right now. You have seen
the yen and the Swissie strengthen," he added.
Low-yielding currencies such as the yen and Swiss franc
tend to attract flows during periods of uncertainty as the low
interest rates reflect capital surpluses in their respective
The dollar dropped as low as 104.03 yen <JPY=> and was last
trading at 104.47 yen, down 1.0 percent on the day, and on pace
to post its largest one-day fall since March 26. Against the
Swiss franc, the dollar fell 0.5 percent to 1.0370 <CHF=>.
The euro tumbled 1.1 percent to 162.28 yen <EURJPY=>, its
sharpest daily fall in about 10 weeks at current prices. It
declined 0.7 percent to 1.6108 Swiss francs <EURCHF=>.
RISING RISK AVERSION
Investors' appetite for risk was also dampened by sharp
declines on both European and U.S. stock markets, causing them
to unwind carry trades that are funded by borrowing in the
low-yielding Japanese yen.
Losses on Wall Street were also worsened by news of
management changes at Wachovia Corp (WB.N: Quote, Profile, Research) and Washington
Mutual (WM.N: Quote, Profile, Research).
"We've seen the yen gain and this is a continuation of the
trend we saw overnight in terms of the renewed level of risk
aversion that was sparked by the disappointing news out of the
UK mortgage market," said Joe Manimbo, currency trader at
Ruesch International in Washington.
Sterling fell 0.8 percent to $1.9653, hitting one-week lows
of $1.9597 <GBP=> after the UK mortgage news and poor PMI data
showed a stagnant manufacturing sector. The euro gained against
sterling, rising 0.7 percent, to 79.01 pence <EURGBP=>.
However, a report showing that euro zone manufacturing
activity hit its lowest level in almost three years, hurt the
euro. The euro zone's Purchasing Managers' Index of
manufacturing in May slipped to 50.6, its lowest reading since
August 2005. [ID:nL27558837]
The euro last traded down 0.1 percent at $1.5534 <EUR=>,
after briefly climbing to a session high of $1.5589.
Rising prospects of the Federal Reserve raising interest
rates by year-end from the current 2 percent to deal with
inflation have helped the dollar to keep some edge against the
euro. The euro has retreated some 3 percent from a record high
of $1.6018 hit in April.
With some economic data exceeding market expectations,
analyst reckon there is a chance that the U.S. economy has
probably avoided a recession, helping to keep the dollar
supported versus the high yielding currencies.
Concerns that the housing downturn could spillover to the
rest of the economy prompted the Fed to aggressively cut its
benchmark overnight lending rate by 3.25 percentage points
Federal Reserve Bank of Atlanta President Dennis Lockhart,
who is not a voting member, said on Monday the U.S. economy was
poised for gradual recovery and would duck a severe slowdown.
"The data coming in has us now believing that although
housing and attendant industries are in veritable depressions,
the rest of the economy is just plugging along at a materially
slower rate, but not a recessionary one," independent investor
Dennis Gartman wrote in a note.
Data on Monday showed the Institute for Supply Management's
index of national factory activity rose to 49.6 in May from
48.6 in April. For details, see [ID:nN02255089]
(Additional reporting by Gertrude Chavez-Dreyfuss; editing by
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