Publié par : crise2007 | novembre 8, 2007

Little hope on horizon for troubled dollar

Little hope on horizon for troubled dollar

By Peter Garnham and Joanna Chung

Published: November 7 2007 20:56


Stephen Jen has seen more than a few bouts of negative sentiment towards the US dollar but none as severe as today.

“This is the first time in my career that I am really worried about the dollar,” says the head of currency research at Morgan Stanley.

“I didn’t know it was going to go so far. The dollar is in trouble. What has so far been an orderly move can easily degenerate into a more violent event.”

The collapse of the dollar accelerated on Wednesday, falling to a record low of $1.4730 against the euro, taking its losses so far this year to 11.5 per cent against the single currency.

The dollar also tumbled to fresh lows elsewhere – a fresh all-time low against the Canadian dollar, a 26-year trough against the pound and its weakest level in 23 years against the Australian dollar.

The latest catalyst was comments by Cheng Siwei, vice chairman of the standing committee of China’s National People’s Congress.

He said the country’s $1,430bn foreign exchange reserves should be diversified away from the dollar into strong currencies such as the euro.

Under normal circumstances, investors would have ignored such comments, not least because the subject of China diversifying its reserves away from the dollar is a long-standing one, says Hans Redeker at BNP Paribas.

But on Wednesday, they added fuel to a toxic mix of factors that has been driving the dollar down for months.

Worries about the US financial sector and the mounting credit turmoil are among the main reasons prompting investors to push the dollar lower, traders say.

Concern about the overall health of the US economy is also rising, raising fears among foreign investors over the long-term performance of US assets.

Investors have been discouraged by the US Federal Reserve’s reluctance to clearly signal further interest rate reductions after it cut its main interest rate by 25 basis points to 4.5 per cent last week, says Mr Redeker.

He says: “It looks to us the Fed underestimated the problems in the US financial sector. If Mr Bernanke had spent 10 minutes before last Tuesday’s meeting to call the chief executive of a US investment bank, he would have realised what a mess it is in.”

Some analysts think the dollar’s fall has moved to a dangerous phase. Chris Turner, head of foreign exchange strategy at ING Financial, Markets says the move in the dollar marks a change from the benign depreciation of recent years, which has generally been associated with higher asset prices.

Instead, he says, moves are evolving into “fast markets” and the disorderly adjustments that policy makers abhor.

Ashraf Laidi, chief FX Analyst, CMC Markets US, says: “While this is not the first time that the dollar undergoes a period of broad selling, it is the first time in three years that the currency sustains a protracted period of prolonged selling with negligible corrective moves upwards.”

Hedge funds and short-term speculators have already built up record short positions in the dollar according to the latest figures from the Chicago Mercantile Exchange. Some traders expect this trend to continue, at least in the short term.

Significantly, they have also cut back on short yen positions – which have fallen to about a quarter of July’s record levels – as rising risk aversion has seen reduced appetite for carry trades, in which the low-yielding yen is sold to fund the purchase of riskier, higher-yielding assets elsewhere.

“Short-term investors have moved away from the previously profitable carry trade and instead are all focusing on selling the dollar in the face of weakening US fundamentals,” says Simon Derrick at Bank of New York Mellon. There were also signs yesterday that longer-term, unleveraged investors were also chasing the dollar lower.

According to Mr Turner, failure by Jean-Claude Trichet, the president of the European Central Bank, to show any displeasure with the euro/dollar rate at today’s press conference could trigger the single currency’s move to $1.50. “If dollar weakness accelerates and contributes to deeper losses in US equities and even Treasuries, the case for co-ordinated intervention to counter disorderly market adjustments builds,” he says.

However, Steve Barrow, chief currency strategist at Bear Stearns, says: “If the dollar starts to fall quickly against currencies like the euro and the pound it seems to spark risk aversion, weaker stocks and could, in theory, lift the dollar against ‘high risk’ currencies.

“That’s not happened so far but, if the dollar continues to slide fast, it could.”

The mood for the dollar, at least for now, remains decidedly bearish. “Investors waiting for a dollar rally to sell into have thrown in the towel and sold it ,” says one trader at a London bank.

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