Repatriated funds aid dollar’s advance

The Financial Times ^ | 9/15/2008 | Peter Garnham

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The dollar recovered from early sharp losses on Monday, while the yen and Swiss franc were lifted by demand for safe haven assets.

Turbulence on FX markets followed the dramatic events in the US financial sector, where Lehman Brothers filed for bankruptcy and Bank of America offered $50bn for Merrill Lynch.

“The liquidation of Lehman’s positions is likely to lead to increased volatility in financial markets and could place greater pressure on already distressed markets,” said Lee Hardman at Bank of Tokyo-Mitsubishi UFJ.

Investors’ immediate reaction to the Lehman collapse was to sell the dollar against the euro and sterling as confidence in US assets was undermined.

However, the US currency rallied sharply after hitting a one-week low of $1.4479 against the euro and trading down to $1.8128 against the pound.

Analysts said recent evidence suggested that any weakness in the dollar would be short-lived as investors turned their attention to the growth implications for the rest of the world from the financial markets turmoil.

Indeed, the dollar has benefited in recent weeks as US investors cut positions in asset markets across the globe and repatriated funds.

The dollar recovered to stand up 0.9 per cent at $1.7919 against sterling and 0.9 per cent stronger at $1.4180 against the single currency by midday in New York.

Similarly, the low-yielding Japanese yen strengthened significantly in early trade against the dollar, lifted by its appeal as a haven.

However, after hitting a two-month high of Y104.55 early in the session, the yen gave back its gains to stand 0.2 per cent lower at Y106.10 against the US currency.

The yen strengthened elsewhere, however, rising 0.7 per cent to Y150.45 against the euro and climbing 0.3 per cent to Y190.22 against the pound. The yen’s gains were greatest against the high-yielding Australian and New Zealand dollars. Both currencies have been bought aggressively by Japanese retail investors, searching for higher returns than the 0.5 per cent interest rates on offer at home.

However, analysts said the yen was now set to surge higher as these positions were abandoned.

“Given the huge overhang of long Australian dollar and New Zealand dollar positions against the yen on the part of Japanese retail investors, and the fact that Tokyo was closed overnight, we see a significant risk of forced liquidation in the these currency pairs in the next few sessions,” said Adam Cole at RBC Capital Markets.

The yen rose 2.2 per cent to Y85.74 against the Australian dollar and climbed 0.8 per cent to Y70.03 against the New Zealand dollar. The Swiss franc also advanced, rising 0.8 per cent to SFr1.1208 against the dollar.