Tags: Dollar | Yen | Economic | Fears

Dollar, Yen Jump as Investors Shun Risk on Economic Fears

Thursday, 18 Aug 2011 04:54 PM

Signs of a weakening economy and concerns over European banks' exposure to euro zone debt had investors stampeding into safety on Thursday, prompting investors to place bets on the U.S. dollar and Japanese yen.

A confluence of dismal U.S. economic data rattled financial markets, with global stock markets tumbling on fears that the economy may be sliding back into a recession.

Factory activity in the U.S. Mid-Atlantic region slumped to a nearly 2-1/2 year low in August, sales of existing homes unexpectedly dropped in July while new claims for unemployment benefits rose more than expected last week. For story

"Indeed, for the moment it is hard to see the markets breaking decisively the spell of uncertainty created by global growth fears, constrained monetary and fiscal policy choices and the lingering European debt crisis," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

In early afternoon New York trade, the euro was down 0.9 percent at $1.4298.

"The Swiss franc is bucking the positive trend among the 'safe haven' currencies, on fears of new steps to curb currency strength by the Swiss National Bank," he said.

While the greenback was 0.1 percent higher to 0.7916 franc, the euro was 0.6 percent lower to 1.1332 francs.

Both the euro and dollar initially gained on talk of Swiss National Bank intervention in the forwards market, although the SNB declined comment.

Forward market intervention involves selling Swiss francs in short-dated maturities to flood the market with the currency, then buying them back or rolling them over at a later date.

Traders said by undertaking franc-selling in the forwards instead of in the spot market, the SNB was seeking to drive the return on holding francs even lower, making it less attractive to potential investors.

"Today was not a good day for weak Philly Fed data to be coming out as the market is trading more on emotions than value," said Ken Dickson, investment director for currencies at Standard Life Investments, with assets under management of more than $250 billion.

That said, Dickson, based in Edinburgh, thinks the global economy will not slide into recession as many seem to expect. "We think global growth will be soft, particularly in the developed markets, but we don't think the global economy will be moving into the double-dip area or an extended recession."

He said that in the medium to long term, Standard life remains bullish on the dollar including sterling -- currencies that have struggled as their fiscal deficits came into focus.

"The market has taken them (dollar and sterling) to levels that make them undervalued with market positioning also very low on these currencies."

A lack of more drastic measures from Tuesday's Franco-German summit to address the euro zone debt crisis and worries about a tax on financial transactions affecting the region's banks have kept the euro under pressure.

A Wall Street Journal report overnight saying that the Federal Reserve is scrutinizing European banks in the United States has also dented risk appetite.

The dollar was down 0.1 percent against the yen at 76.480 yen, not far from its record low of 76.25 yen struck in March.

© 2015 Thomson/Reuters. All rights reserved.

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