TOKYO: The dollar hit a two-year high against a basket of currencies on Thursday as concerns about a worsening global economy prompted investors to cut risky assets. The dollar struck a two-year high against the euro while the yen hit a near six-year peak against the European single currency as investors unwound long positions in higher-yielding currencies built in recent years.

“Market players are staggered by the unexpectedly sharp fall in the euro, as well as some emerging currencies,” said Tsutomu Soma, senior manager of foreign securities at Okasan Securities. “Selling in European currencies keeps piling up as investors have realised economies in Europe could deteriorate as much as the US economy,” Soma said.

The persistent market turmoil is another factor behind the strength of the dollar and the yen. Investors are picking up the dollar, the world’s most liquid currency, and the safe-haven yen as financial markets stay fragile, even as global authorities’ efforts have eased some strains in dollar-funding among banks in money markets.

Tokyo’s Nikkei share average plunged 5.5 per cent by midday, after striking a 5-½ year low just above 8,000.

The dollar index, which measures the U.S. currency’s value against a basket of six currencies, edged up 0.2 per cent to 85.646 after hitting a two-year peak of 86.070.

The euro slipped 0.3 per cent from late US trade to $1.2812. In early Asian trade, the European single currency fell as low as $1.2726, its lowest since November 2006, on trading platform EBS.

Investor views that the European Central Bank has more scope to ease rates than the Federal Reserve have also hurt the euro.

The Fed has slashed interest rates by 375 basis points to 1.50 per cent, while the ECB has only lowered rates by 50 basis points to 3.75 per cent.

The euro slid as low as 124.15 yen its lowest since January 2003, before rising to 124.90 yen, down 0.5 per ent on the day.

The dollar was down 0.2 per cent at 97.52 yen, hovering near a seven-month low of 97.23 yen hit on EBS the previous day. Japanese institutional investors were cutting their overseas asset holdings, keeping the yen buoyant.

Sterling fell 0.3 per cent to $1.6223, edging towards a five-year trough of $1.6130 struck the previous day. Bank of England Governor Mervyn King said earlier this week that the British economy was probably entering its first recession in 16 years, sparking a sterling sell-off. King’s comments stoked investor fears about a steep economic downturn in Britain and other European nations, traders said.

Investors were keeping an eye on movements in emerging currencies as they believe that a further slide in them could spark more buying in the safe-haven yen, traders said.

Some investors are suspected of using the yen to hedge against losses in their assets in emerging countries, said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank in Tokyo.

“If that is the case, the yen would automaticly get a boost from a slide in emerging currencies,” Sasaki said.

The Hungarian central bank on Wednesday raised interest rates by 300 basis points to prop up the battered currency. Investors, however, sold the forint on concerns over the health of Hungary’s banking system and its ability to finance a large external debt.

Meanwhile, New Zealand’s central bank slashed interest rates by a record one percentage point to 6.5 per cent on Thursday and said further cuts are in the pipeline as the global financial crisis threatens to exacerbate a local recession.

But traders said the central bank’s move had little impact on the New Zealand dollar as it was widely expected. According to Reuters data, the New Zealand dollar dipped to $0.5925 from around $0.5940 in late US trade.

source: Economictimes

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