US dollar mostly firm; euro hit by budget woes
Posted: 23 June 2009 0549 hrs
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NEW YORK: The US dollar traded mainly higher on Monday amid financial market jitters that triggered renewed safe haven flows, while the euro was hit by worries about budget deficits and banking in the eurozone.
Trade was cautious as the market awaited the outcome of a two-day US Federal Reserve monetary policy meeting.
At 2100 GMT, the euro sank to 1.3856 dollars from 1.3934 dollars in New York late on Friday.
Against the Japanese currency, the dollar declined to 95.86 yen from 96.31 yen on Friday.
The euro's fall reversed gains made in recent weeks fuelled by investors' appetite for risk. With global stock markets hit hard on Monday, the dollar became the currency of choice along with the yen.
"The dollar is beginning the week with very solid support as equities are under pressure," said Sacha Tihanyi at Scotia Capital.
"There is increasing speculation that risk thirst has now been overdone for the time being."
Jon Gencher at BMO Capital Markets also cited renewed risk aversion.
"On top of the political tensions emanating out of North Korea and Iran, (the market learned that) the World Bank cuts its forecast for the global economy for 2009 and (of) a possible credit downgrade for the state of California," he said.
Gencher said the yen was helped by a report showing Japan's services industry grew 2.2 percent in April with the manufacturing sector becoming less pessimistic, "which should point to an improvement in the all important Tankan report, due out next week."
CurrenciesDirect analyst Phil McHugh said the euro's drop was "due to banking fears again creeping into the scene."
"The European Central Bank has warned that the region may face another 283 billion euros of losses by the end of next year and it seems that the skeletons are still appearing for Europe's banking sector," said McHugh.
Boris Schlossberg at Global Forex Trading said the market focused on a Wall Street Journal report that suggested German budget deficits could widen significantly in 2010, with a deficit of as much as 100 billion euros.
"Given the fact that euro balance sheet support is contingent almost solely on Germany's finances (this) news was not received well by the market," he said.
Traders also looked to this week's US Federal Reserve interest rate meeting, which begins on Tuesday, dealers said.
The Fed, led by chairman Ben Bernanke, is expected to maintain its near-zero base interest rate along with programmes providing liquidity to the financial system, including vast purchases of Treasury debt and other securities.
"Due to the Fed's unconventional monetary policy measures it is completely unclear to markets how the bank is controlling key rates in the face of this extraordinarily deep recession," Commerzbank analysts wrote.
"Markets are awaiting signs of the Fed's medium term strategy," Commerzbank analyst Ulrich Leuchtmann said.
"For a clear direction in euro/dollar to emerge we will therefore have to see clearer signals from the Fed."
Derek Halpenny of Bank of Tokyo-Mitsubishi said he expected the Fed "to give a very clear signal over its commitment to maintain the current ultra-loose monetary stance."
In late New York trade, the dollar stood at 1.0866 Swiss francs after 1.0810 on Friday.
The pound was at 1.6343 dollars from 1.6491. - AFP/de
(channelnewsasia.com)