Posted on 09/18/2008 8:22:24 PM PDT by bruinbirdman
The dollar suffered yesterday as coordinated action from global central banks to ease liquidity tension in the world's money markets dented its newly found status as a safe-haven currency.
Analysts said the dollar had previously benefited as worries over the state of the global financial system heightened risk aversion, prompting US investors to repatriate funds that had been invested in foreign equities, while lower inflation expectations had supported demand for US bonds.
"In a world where cross-border equity investing collapses and bond flows remain stable, there is a net inflow back into the dollar," said Michael Metcalfe of State Street Global Markets.
However, analysts said the decision by global central banks to inject $180bn of emergency dollar liquidity into the market had helped boost risk appetite and damp demand for the dollar.
By midday in New York, the dollar fell 0.4 per cent to $1.4370 against the euro, slipped 0.2 per cent to $1.8180 against the pound and lost 0.2 per cent to SFr1.1025 against the Swiss franc.
The dollar's losses were largest against the high-yielding Australian and New Zealand dollars, which had been the worst hit among leading currencies during the recent market turmoil.
Indeed, Steve Malyon, of Scotia Capital, said a move back into cyclical and commodity currencies at the expense of the low-yielding currencies was behind much of yesterday's dollar weakness.
"With equities higher, policymaker activism appears to have encouraged investors to take on a bit more risk, even as we hear reports that liquidity remains an issue," he said.
"We think that this is a precarious situation indeed and would be very reluctant to view it as anything more than a short-term trend," he added.
The Australian dollar rose 2.2 per cent to $0.8019 against the dollar while the New Zealand dollar climbed 2.2 per cent to $0.6721.
The news also helped boost emerging market currencies, which have suffered badly in recent weeks as foreign investors cut back positions.
The South African rand rose 1.3 per cent to R8.1747 against the dollar, the South Korean won climbed 3.3 per cent to Won1,152.40 and the Brazilian real gained 0.4 per cent to R$1.8850.
Meanwhile, the low-yielding yen, which like the dollar has also been widely used as a funding currency, fared worse than the US currency.
The yen dropped 0.8 per cent to Y105.20 against the dollar, lost 1.2 per cent to Y151.10 against the euro and fell 1 per cent to Y191.15 against the pound.
I always wondered what the people thought was happening in september of 1929. Looks like we are all about to find out.
The previous 5 years to the Great Depression saw a large bull market. People invested heavily because the seriously thought that the market would always go up and make them money. Regulations were very lax in lending and financial institutions traded between each other in order to artificially inflate the price of their stocks.
Anything sound familiar?
But, of course, the folks in the 20-’s didn’t have big daddy Gov’t there to try and protect the fools from the consequences of their own ill conceived plans, eh??
George Soros is behind this mess!
The Monetary Slut Ben Bernanke is paying you 3% to take dollars from him (5% Inflation less 2% Fed Funds Rate).
You mean people are waking up to the fact that there are too many dollars?
Gee! Whoda Thunk?
Wait till this filters through the system we will be using it for toilet paper in a couple of years.
Thanks Bernake/paulson
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