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Thursday July 12, 2007 - 09:46:08 GMT
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FOREX NEWS-Dollar hits new lows as subprime worries linger

FOREX-Dollar hits new lows as subprime worries linger
Thu Jul 12, 2007 4:44 AM ET

(Changes dateline, byline, updates prices, adds quotes)

By Jamie McGeever

LONDON, July 12 (Reuters) - The dollar hit a record low against the euro and a multi-year trough versus a basket of major currencies on Thursday as fears persisted that problems in riskier U.S. credit markets could spread to the wider economy.

These concerns appear to have abated somewhat in other markets -- equities steadied, bond yields rose and credit spreads tightened slightly -- but currency investors continued to slam the dollar.

The yen, meanwhile, took advantage of the dollar's malaise to rebound broadly after the Bank of Japan left interest rates on hold at 0.5 percent, as expected.

The yen's gains, however, were limited and the ultra low-yielding currency remained mired near historic lows against higher-yielding units as investors remained unconvinced rates will be lifted any time soon.

"What is becoming clear to the market is that the (U.S.) housing sector, whether through financial markets or the economy itself, still has more to play out," said Derek Halpenny, senior currency strategist at BTM-UFJ.

He and other analysts expressed some surprise at the yen's rebound given that BOJ policymakers voted 8-1 to keep rates on hold, a sign that monetary tightening may still be a couple of months away.

"It's been a market of weak dollar and weak yen, but if the market focuses on the dollar, that has (downward) implications for dollar/yen. There's a bigger picture in terms of volatility and risk aversion," Halpenny said.

At 0815 GMT, the euro was up 0.3 percent on the day at $1.3780 , having set a record high of $1.3792, according to Reuters data .

The dollar was down a quarter percent against the yen at 122.07 yen and sterling hit a fresh 26-year high of $2.0364 .

The dollar index <.DXY> was down 0.15 percent at 80.61, having just struck a two and a half year low of 80.57, and on Wednesday, the Federal Reserve's broad nominal dollar index fell to its lowest level in a decade.


The dollar's sell-off this week has been exacerbated by reports from credit rating agencies Standard & Poor's and Moody's Investors Service on Tuesday that warned on over $17 billion of debt related to risky mortgages, much of it subprime. Subprime loans are extended to borrowers with poor credit.

This has prompted interest rates futures markets to go back to pricing in a Fed rate cut later this year.

Fed officials, led by Philadelphia Fed President Charles Plosser and Fed Governor Kevin Warsh, on Wednesday played down the wider threat from any subprime fallout.

But while other central banks such as the European Central Bank, Bank of England and eventually the BOJ are in tightening mode, the dollar's yield appeal is eroding.

"As long as the market is biased toward a Fed cut rather than a hike, and the ECB and others are raising rates, the trend stays in place. You sell the dollar," Halpenny at BTM-UFJ said.

This hunt for yield from Japanese investors, meanwhile, could limit the yen's upside, especially after BOJ Governor Toshihiko Fukui said on Thursday BOJ policymakers wanted more time to assess the economy before raising rates.

"I'd expect the yen's gains to be fairly limited although one spanner in the works is positioning, which always comes to the forefront with all these subprime issues," said Neil Jones, head of hedge fund sales at Mizuho.

On the data front, investors will be looking to U.S. May trade data at 1230 GMT. Economists expect the deficit to widen to $60 billion from $58.5 billion.

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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