LONDON (Thomson Financial) - The dollar continued to weaken further, touching new 26-year lows against the pound and staying near all-time lows against the euro, as a lack of hard data left the market focused on the troubled subprime mortgage market in the US.
The greenback initially slumped yesterday on a knee-jerk reaction to news that Standard&Poors put 12 bln usd of subprime bonds on review for possible downgrade. That was exacerbated after the close when Moody's put another 5.2 bln usd on review.
The effect was a bout of risk aversion among investors that has only just showed signs of stabilizing. How long and hard the selloff will be is currently a matter of market speculation.
"It is clear that troubles surrounding the US housing market and the dubious precision of risk assessment on the part of certain lenders could yet reveal themselves to be the ultimate catalyst in bringing to an end an extraordinary period of robust risk appetite," said Neil Mellor at Bank of New York.
The dollar's fall was accompanied by bids in the yen as investors unwound risky trades which use the Japanese currency to fund investments in higher-yielding assets.
However, although risk aversion increased, the resilience of some high-yield currencies like the Australian and New Zealand dollars as well as the euro and pound suggest the market is at the moment not overly concerned that the US housing trouble could derail global growth.
Mellor noted the retreat of the euro and pound against the yen has been very modest, considering the circumstances.
"Indeed, this is particularly the case when the current retreat from risk is considered alongside past episodes of deleveraging," such as the 7 pct fall in the pound against the yen in February, Mellor noted.
Whereas the dollar will remain sensitive to market jitters around the subprime mortgage market, yen investors will likely look to a Bank of Japan rate decision tomorrow for more direction.
The BoJ is widely expected to keep its key interest rate unchanged at 0.50 pct, but the statement will be watched for clues as to any future hikes.
Daragh Maher at Calyon says a hike now or at the August meeting is unlikely because core inflation is currently negative, but that a subsequent pick-up in inflation and growth should keep the BoJ on a monetary tightening path.
"We continue to believe that the central bank will wait until later in the year to hike, most likely October, by which time core CPI will be back above zero and activity may have recovered from a temporary soft spot," said Maher.
London 1630 BST London 1343 BST
US dollar
yen 122.21 up from 121.84
sfr 1.2036 up from 1.2030
Euro
usd 1.3760 up from 1.3750
yen 168.17 up from 167.55
sfr 1.6562 up from 1.6541
stg 0.6772 up from 0.6770
Sterling
usd 2.0321 down from 2.0324
yen 248.32 up from 247.50
sfr 2.4458 up from 2.4450
Australian dollar
usd 0.8621 up from 0.8620
stg 0.4242 up from 0.4241
yen 105.33 up from 105.02
carlo.piovano@thomson.com
cp/lam
