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Dollar gains broadly as risk aversion remains high
February 25, 2009 / 1:33 AM / 9 years ago

Dollar gains broadly as risk aversion remains high

NEW YORK (Reuters) - The dollar strengthened on Wednesday as weak U.S. housing data and concerns about the global economy boosted the greenback’s appeal as a safe haven despite President Barack Obama sounding a more optimistic tone.

Late on Tuesday, Obama tried to reassure Americans in an address to Congress that the country would emerge stronger from the financial crisis. But analysts said he shed little light on how his administration would stabilize the economy.

Data showing the pace of existing U.S. home sales fell 5.3 percent in January weighed on stocks and triggered more dollar buying against the euro. Stocks pared losses late in the session.

The negative housing data “have rekindled the demand for safe-haven dollar assets,” said Omer Esiner, senior market analyst at Ruesch International in Washington.

Esiner noted the dollar rose to session highs against the euro, sterling, Canadian dollar and other major counterparts after the release of the data.

In late afternoon trading in New York, the euro was down 0.8 percent at $1.2735, after earlier touching a session low of $1.2691. Sterling traded 1.7 percent lower at $1.4220.

Obama’s address to Congress followed Capitol Hill testimony by Federal Reserve Chairman Ben Bernanke on Tuesday in which he said the significant value built up in the country’s banks would be lost if the government owned them, easing investor fears that the banks would be nationalized.

Bernanke’s prepared testimony to the House Financial Services Committee on Wednesday was identical to the previous day.

The dollar has been in demand as one of the last safe-haven currencies at a time of global economic uncertainty and risk aversion even as the U.S. suffers its own economic problems.

Any optimism that the global economy could be recovering, however, should prompt investors to sell the dollar and buy riskier assets and currencies.

“When panic and risk aversion abate, money will start flowing into other regions such as Europe,” said Axel Merk, portfolio manager of the California-based Merk Hard Currency Fund.

Merk added he expects the dollar to fall sharply once demand for Treasury and agency debt eases and as the U.S. current account deficit swells.

WEAK EUROPEAN DATA

Still, data in Europe on Wednesday showed Germany’s economy contracted by a record 2.1 percent in the fourth quarter, dragged down by foreign trade.

Separately, revised data showed Britain’s economy shrank an unrevised 1.5 percent in the three months to December.

For now, “the euro continues to be weighed down by problems in the euro zone,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, in a note to clients.

The yen, which had been one of the few other bright spots in foreign exchange markets on Wednesday, reversed direction and fell against the dollar as the New York session progressed.

The dollar was last up 0.8 percent against the yen at 97.54 yen.

“There are a number of themes running through the market and it just depends on which is being focused on,” said John McCarthy, director of foreign exchange at ING Capital Markets in New York. “You look at the data out of Japan and they have some serious problems.”

Japan’s exports nearly halved in January from a year earlier, with record slides in shipments to the United States, Europe and the rest of Asia pointing to a deepening recession across much of the world.

Additional reporting by Nick Olivari and Wanfeng Zhou; editing by Diane Craft

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