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Thursday August 21, 2008 - 20:35:41 GMT
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FX Blog- FOREX-Financial jitters, high oil price hammer U.S. dollar

FOREX-Financial jitters, high oil price hammer U.S. dollar

Thu Aug 21, 2008 4:04pm EDT

* Dollar falls broadly, financial sector jitters weigh

* Dollar index on track for worst loss in five months

* Oil prices surge, add to pressure on the dollar (Recasts, updates prices, changes byline)

By Lucia Mutikani

NEW YORK, Aug 21 (Reuters) - The dollar fell broadly on Thursday as worries of wider credit-related losses at some U.S. financial firms made investors abandon risky trades, igniting a rally in the yen and Swiss Franc.

A surge in crude oil prices above $120 a barrel also took some steam out of the dollar's recent strong recovery, setting it on track for its worst one-day fall in five months against a basket of six currencies..

It was on course for its sharpest daily loss against the yen since July, while the euro eyed its biggest single day gain versus the U.S. currency also since July.

"Renewed concerns over the financial sector are creating a risk averse environment where the dollar underperforms. Oil spiking higher is also helping to drive the dollar lower," said Dustin Reid, a currency strategist ABN Amro Bank in Chicago.

The dollar fell as low as 108.14 yen <JPY= at one point, though it rebounded and was down 1.2 percent at 108.52 yen in late New York trade. Against the Swiss franc, the dollar fell 1.2 percent to 1.0870 Swiss francs <CHF=>.

Low yielding currencies such as the yen and Swiss franc tend to attract flows during periods of uncertainty as the low interest rates reflect the capital surplus of their respective countries.

Those sharp losses helped to push the ICE Futures U.S. dollar index to a session low of 76.056 .DXY. The index, which measures the dollar's value against a basket of currencies, was last down 1.0 percent at 76.117.

FINANCIALS BACK UNDER SPOTLIGHT

Worries over the U.S. financial sector were back on investors' radar screen, with Citigroup cutting its third quarter earnings estimates for Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

It also lowered estimates for Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz), and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), citing expected losses on hard-to-sell assets and lower client trading volumes.

Analysts remained optimistic about the dollar's prospects, saying the latest dip was just a pullback in what was generally a dollar bull market, but cautioned that much would depend on the oil price and developments in the financial sector.

"Although I think that we have not seen the end of dollar strength, the combination of weaker economic data, troubles in the financial sector and rising oil prices should lead a further correction in the dollar this week," said Kathy Lien, a director of currency research at GFT Forex in New York.

"The biggest risk in the markets right now are the financials. If oil prices move back above $130 a barrel, the 30 cent drop that we have seen in gasoline prices could reverse, bringing back concerns about inflation and the outlook for the U.S. economy."

The euro raced to a session high of $1.4896 and was last up 1.0 percent at $1.4888 <EUR=>. Against the yen, the euro was last down 0.2 percent at 161.55 yen <EURJPY=>.

Analysts said the euro would probably struggle to rise above $1.50 against the dollar, given concerns about slower growth in the euro area.

European Central Bank policymaker Klaus Liebscher told Reuters on Thursday that euro zone growth was expected to come in at the bottom end of expectations this year but an all-out recession in the region was highly unlikely.

"We are still going to see a dollar recovery, but it's going to to be volatile and choppy. It's not going to be a straight line of dollar appreciation," said ABN Amro's Reid.

"There are two distinct camps, one that has risk averse mentality and one that has risk appetite mentality. Those opposing camps are going to keep markets choppy."

U.S. data on Thursday showed a moderation in the number of first time applicants for jobless benefits last week, but the four-week moving average of new claims rose to its highest since December 2001.

Both the yen and Swiss franc gained versus the high yielding Australian and New Zealand dollars. (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama)

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