Wednesday October 22, 2008 - 09:10:27 GMT
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Reuters - www.reuters.com
FOREX NEWS-Dollar jumps to 2-yr high vs euro on risk unwind
* Dollar hits 2-year high vs euro, currency basket
* Traders liquidate high-risk positions, also boosting yen
* Sterling battered after BoE King's recession comments
(Changes dateline, byline, adds comment, details, updates
By Naomi Tajitsu
LONDON, Oct 22 (Reuters) - The dollar soared to a two-year
high against the euro and a basket of currencies on Wednesday as
a worsening global economic outlook prompted more investors to
liquidate risky assets in favour of the U.S. currency.
The yen climbed to a 4-1/2-year high against the euro, with
the low-yielding Japanese currency also benefitting from the
exodus from risky assets after being dogged by carry trades for
Analysts said that speculators who had built up investments
in high-risk assets, such as those in currencies benefitting
from higher yields, have been dumping those positions as already
weakening global economies are expected to take a further hit as
nations try to rescue their banking sectors.
This drove the euro <EUR=> down as far as $1.2740 according
to electronic trading system EBS, its lowest since November
2006, while sterling dropped roughly 3 percent to around $1.62,
its weakest in five years.
Against a basket of currencies belonging to major U.S.
trading partners, the dollar climbed to a two-year high of
85.921, before pulling back slightly to 85.550.
"We've moved down to new ranges in euro/dollar and
sterling/dollar, and the market has to find a base for these
ranges," said Steve Barrow, head of G10 currency research at
Standard Bank, pointing out that both pairs had crashed through
major support levels.
He added that he expected that the dollar would probably
gain further in the near term.
By 0818 GMT, the euro had trimmed back some of its losses to
trade at $1.2875, down 1.4 percent on the day, while sterling
was down 2.2 percent at $1.6313.
Sterling was one of the day's biggest losers, having tumbled
after Bank of England Governor Mervyn King said on Tuesday that
Britain's economy was probably entering its first recession in
16 years. [ID:nLAG003088]
Despite the dollar's broad gains, it fell more than a
percent to 99.20 yen <JPY=> as the ongoing unwind in carry
trades extended the Japanese currency's rally.
The yen has shot up after having suffered for years as low
Japanese yields made the currency a prime candidate to fund
risky investments in the assets of higher-yielding currencies.
Other high-yielders were hammered against the yen, with
sterling <GBPJPY=> dropping roughly 4 percent to 160.94 yen, its
lowest in nearly eight years, while the Australian <AUDJPY=> and
New Zealand dollars <NZDJPY=> each fell roughly 3 percent.
Thin volumes exaggerated the moves, with bid/ask spreads
unusually wide. Even speculators were reluctant to step into the
market, adding to the volatility, traders said.
Selling of the dollar and the yen to fund investment in the
euro and other higher-yielding currencies and assets was most
beneficial to investors when the global economy grew steadily
and emerging markets boomed.
But traders said all that has changed as the meltdown in the
global banking sector and escalating speculation of a global
recession have resulted in investors scrambling to exit
Worldwide efforts have eased some strains in dollar funding
among banks in money markets, but investors continue to pick up
the world's most liquid currency for safety as the state of
financial markets remains fragile, traders said.
(Editing by Andy Bruce)
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