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Tuesday October 16, 2007 - 20:58:35 GMT
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FOREX NEWS-Dollar, yen rise as risk appetite declines

Tue Oct 16, 2007 4:40pm EDT

(Updates prices and adds comments)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 16 (Reuters) - The dollar rose and high-yielding currencies such as the New Zealand dollar fell against the yen on Tuesday as investors grew wary of risky trades amid a sell-off in global equities and a surge in oil prices.

The dollar initially sold off after a report showed a record net capital outflow in August, but recouped some of its losses. Traders said the net capital outflow was a one-off phenomenon that reflected the financial market's meltdown two months ago.

The yen also gained broadly, with investors selling high-yielding assets funded by the currency's cheap rates in carry trades.

Sluggish corporate earnings, renewed worries about liquidity and credit, and soaring crude oil prices stoked concerns about global growth. On Tuesday, oil jumped to a record price above $88 per barrel (CLc1: Quote, Profile, Research) amid growing tensions in the Middle East, while U.S. stocks weakened, hurt by disappointing earnings from banks such as Wells Fargo & Co. (WFC.N: Quote, Profile, Research).

"The dollar's strength is partly a reflection of additional nervousness by investors and it's getting some flight to safety flow," said Stephen Malyon, senior currency strategist at Scotia Capital.

"Overall, I think the dollar is following the broader market. The euro is weak, for instance, because euro/yen has come off due to the carry unwinding and that has affected euro/dollar," he added.

In late afternoon trading, the euro traded 0.3 percent lower against the dollar at $1.4167 <EUR=>. Against a basket of currencies, the dollar was up 0.2 percent at 78.224 (.DXY: Quote, Profile, Research), moving further away from a record low of 77.660 hit earlier this month.

Data on Tuesday showed the United States posted a record net $163 billion capital outflow in August, as foreign investors fled from dollar-denominated assets amid a meltdown in the U.S. subprime mortgage market that triggered a global credit crunch.

For details on the data, click ID:[nN16446950].

Analysts, however, said the report did not signify a long-term trend and capital flows have recovered since the turbulence in August.

"Although the data were poor, to some extent it was an aberration, largely affected by the credit turmoil we had in August," said Shaun Osborne, chief currency strategist at TD Securities. "But we have seen in the weekly Federal Reserve custody holdings data that inflows have recovered after that dip we saw in August."

The capital flows report had its most pronounced impact on the dollar's rate against the yen, with the greenback posting its largest one-day drop in more than two weeks at current prices, according to Reuters data.

The dollar fell 0.6 percent to 116.65 yen <JPY=>. The euro plunged 0.9 percent to 165.32 yen <EURJPY=>.

The high-yielding Australian dollar slid 2.2 percent to 103.35 yen <AUDJPY=R>, while the New Zealand dollar sank more than 3 percent to 86.74 yen <NZDJPY=R>. Both falls were a reflection of the current risk-averse environment.

Meanwhile, traders also took note of the drop in U.S. home-builder sentiment in October, which fell to a record low as borrowers faced difficulty in getting mortgages from stricter lenders. See [ID:nN16469378]. Housing reports have garnered more attention than usual after the sector's downturn precipitated a global credit crunch.

On Wednesday, more housing reports are due with the release of U.S. housing starts and building permits data for September, and both are expected to show further weakness. Markets will also focus on key inflation numbers for last month.

"The Fed should leave the door open for further easing given the uncertainties overshadowing the outlook for growth -- especially the likely drag posed by housing -- but should also probably reaffirm its preparedness to reverse the recent monetary policy ease should inflation become more of a problem," said Bear Stearns in a research note.

© Reuters 2006. 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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