Posted on 11/09/2007 8:25:54 PM PST by bruinbirdman
High-yielding currencies were on the end of a severe thumping on Friday as equity market turmoil caused a retreat from carry trade positions.
The carry trade, where low-yielding currencies such as the yen are sold to fund higher-yielding purchases, is a risky strategy, as yield-based gains can be wiped out instantly by volatile price swings.
The sense of panic caused by tumbling global stock indices left the Australian dollar down 3.5 per cent against the yen, even though the currency was supported by this week’s 25 basis point increase in Australian interest rates to 6.75 per cent.
Over the week, the Aussie fell 4.2 per cent to Y101.39. The New Zealand dollar fell 2.7 per cent Friday, and was off 3.1 per cent over the week. Sterling fell 3.3 per cent over the week to Y231.96 and the euro was off 2.5 per cent to Y162.40.
Switzerland’s low-yielding franc, another favoured funding currency for the carry trade, rose 2.8 per cent against the dollar to SFr1.1218 over the week and by 2.3 per cent to SFr2.3543 against the pound.
The dollar fell 3.4 per cent to Y110.88 on the week amid rising concerns that the market turmoil would weaken the US economy and force the Federal Reserve into further interest rate cuts.
Ben Bernanke, Fed chairman, speaking on Thursday to the Congressional Joint Economic Committee, expressed heightened concerns that weakness facing the financial and housing markets could hurt US economic growth.
Although inflation was still a concern, Mr Bernanke said growth would slow “markedly” this quarter and would remain “sluggish” during early 2008. His comments raised expectations of further near-term rate cuts.
“We believe that the risk posed by continued dislocation in financial markets, and subsequent tightening credit conditions will prompt the Fed to ease more than is currently expected,” said Lee Hardman, at Bank of Tokyo-Mitsubishi UFJ.
The European Central Bank, on the other hand, was not expected to cut rates any time soon after Jean-Claude Trichet, ECB president, said on Thursday that the bank was still concerned over inflation. This verdict on the eurozone economy came after the ECB announced it was keeping interest rates at 4 per cent.
The euro was up 1.3 per cent over the week at $1.4692, having reached a new record on Friday of $1.4752.
The dollar was sold most heavily on Wednesday after a Chinese politician said the country’s central bank should take advantage of strong currencies to counter the weakness of the dollar in China’s $1,430bn reserves.
US economic data was mixed. The trade deficit narrowed unexpectedly sharply to $56.4bn in September. “We expect the deficit will continue to narrow as the weak dollar boosts exports and weakens import demand,” said Richard Snook, at the Centre for Economics and Business Research.
Sentiment was dented after consumer confidence measured by Michigan University fell to a 25-month low.
The Bank of England also resisted calls to lower its main interest rate on Thursday, holding at 5.75 per cent, amid continued worries about high inflation.
Sterling rose 0.9 per cent over the week to $2.1004, having hit a 26-year peak of $2.1161 on Friday.
The pound was down against the euro as data, including house prices and trade figures, came in on the weak side.
The euro was up 0.8 per cent over the week to £0.7001.
The yields on US Treasuries keep going down. Especially on the short end.
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