Wednesday December 31, 2008 - 01:21:42 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro best of a bad bunch as rates diverge
SYDNEY, Dec 31 (Reuters) - The euro was gaining ground in
Asia on Wednesday as tumbling U.S. yields undermined the
dollar, while a truly dire outlook for the UK economy kept
sterling pinned near record lows.
Dealers said the euro was proving the best of a bad bunch
as the relatively staid pace of easing by the European Central
Bank contrasted with the dramatic pace of rate cutting by the
Federal Reserve and Bank of England.
"All the major countries have awful economic fundamentals,
but right now the euro offers the best pure rate return," said
a trader at a local bank in Sydney, noting U.S. yields had all
but dropped off a cliff in recent weeks.
"The dollar has the added problem that the Fed is printing
loads of them to rescue the economy," he added. "It's a case of
more supply than demand at the moment."
The euro edged up to $1.4115 <EUR=> in Asian trade, from
$1.4072 late on New York on Tuesday, though trading was very
thin with Tokyo on holiday and many investors away for the New
Year break. Against a basket of currencies, the dollar was down
almost 1 percent .DXY at 80.627.
The euro was also holding firm at 97.75 pence <EURGBP=D4>,
having touched a high of 98.05 on Tuesday, and seemed set on
reaching parity for the first time since its launch in 1999.
The single currency has climbed around 33 percent against
sterling so far this year as a slump in the UK economy led the
BoE to cut rates from 5.5 percent to just 2.0 percent.
The Fed has been even more aggressive, slashing its funds
rate to a record-low range of zero to 0.25 percent, from 4.25
percent at the end of 2007. In contrast, the ECB has eased by a
relatively tame 150 basis points to 2.5 percent.
More dire U.S. economic data on Tuesday only added to
expectations of further action from the Fed. Prices of
single-family homes in October plunged a record 18 percent from
a year earlier, while consumer confidence fell to a record low
in December. For details, see [ID:nNYS004673] and
At the same time the U.S. central bank announced details of
a plan to buy up to $500 billion of agency mortgage debt by the
middle of 2009 [ID:nN21494092]. That splurge would be funded by
expanding its balance sheet -- in effect printing more dollars
-- and there was even talk of it buying longer-dated Treasury
All of which helped 30-year Treasury bonds surge over 2
points in price on Tuesday, driving yields down almost 10 basis
points to 2.55 percent.
That yield has fallen all the way from 4.30 percent as
recently as mid-November and is now far below the euro zone
30-year yield of 3.53 percent, making the dollar less
attractive from a pure interest rate perspective.
The odd one out in all this has been the Japanese yen,
which has surged across the board this year even as the economy
slid into recession and rates were cut to near zero.
That outperformance was largely the result of a massive
unwinding of carry trades -- where investors used to borrow in
yen to invest in higher yielding currencies.
While the yen was steady at 90.26 per dollar <JPY=> on
Wednesday, that compares to 111.33 at the end of last year.
Even the euro has shed around 22 percent of its value against
the yen this year to hover around 127.45 yen <EURJPY=>.
(Reporting by Wayne Cole; Editing by Jonathan Standing)
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