Tuesday October 21, 2008 - 09:38:08 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dlr firm as demand for cash outweighs fundamentals
* Dlr index near 16-month high, euro/dlr at 1-1/2 yr low
* Yen up in reflection of underlying financial market stress
* Banks funding demand still dollar-supportive
* Investors start to look beyond money market jam
(Releads, changes dateline, byline, adds quotes, update
prices PVS TOKYO)
By Veronica Brown
LONDON, Oct 21 (Reuters) - The dollar hit its highest in
1-1/2 years versus the euro on Tuesday and held near 16-month
highs against a basket of currencies fuelled by ongoing demand
from banks picking up the U.S. unit for their funding needs.
Comments from Federal Reserve Chairman Ben Bernanke on
Monday also helped the dollar find favour as he endorsed further
government spending aimed at stimulating the flagging U.S.
By contrast, the euro is being left on the defensive with a
perception of the single currency zone having scope for
aggressive monetary easing biting hard, as the global economic
outlook dims further.
Yen strength also reflected underlying nerves on the global
economy's prognosis as investors' concerns start to move beyond
money markets and onto the real economy.
While jammed-up interbank lending has loosened in recent
days -- a backdrop of overall tight credit conditions and a bear
market in global shares has lifted dollar and yen demand as
investors continue unloading highly-leveraged positions.
"There's more hopeful signs that we're getting interbank
money rates coming down, but to translate that into the FX
market it's not going to result in a notable turnaround in the
appetite for deleveraging and reducing risk," said Derek
Halpenny, European head of global FX research at BTM-UFJ in
"Also you have to make the argument that countries that are
being a little bit more proactive in trying to offset the
negative macro economic consequences that are coming are being
rewarded to a degree in the FX market," he added.
The dollar index, which measures the U.S. currency's value
against a basket of six currencies, firmed to 83.139 .DXY,
near a 16-month high of 83.230 hit on Monday, according to
Asia-based traders cited some speculation overnight that
market players needed more dollars to settle credit derivatives
tied to the bankruptcy of Lehman Brothers.
The euro hit its lowest since March 2007 at $1.3237 before
paring losses slightly to stand at $1.3253 by 0825 GMT, down 0.7
percent on the day.
The dollar fell 0.7 percent against the yen to 101.18 yen,
<JPY=> slipping from an earlier high of 102.16 yen, with traders
expecting the pair to stay in a 101.50-102.50 yen band on
Tuesday. The euro dropped 1.4 percent to 133.95 yen <EURJPY=>.
FUNDAMENTALS TO REIGN AGAIN?
As financial markets regain some poise, analysts said that
fears on the initial impact of the credit crisis were starting
to give way to economic fundamentals and monetary policy.
The Fed's Bernanke on Monday said the economy was expected
to be weak for several quarters and there was some risk of a
protracted slowdown. [ID:nN20254868].
Fed policymakers meet next week, and economists and
investors widely expect another rate cut from the current 1.5
percent after leading global central banks recently acted in
concert to cut borrowing costs.
"Central banks will at least take heart from the ongoing
drop in Libor spreads over their policy rates that monetary
policy may once again be able to influence the real economy,"
Calyon strategists said in a note to clients.
The high-yielding Australian dollar fell 2.75 percent
against the U.S. dollar <AUD=> on expectations for further
policy easing from the Reserve Bank of Australia.
RBA minutes from its meeting earlier this month indicated
there was more room for rate cuts, though not as aggressive as
this month's 100 basis point cut. [ID:nSYD393834]
(Reporting by Veronica Brown; Editing by Victoria Main)
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