Tokyo/Mumbai/Frankfurt: The dollar steadied after tumbling to a record low against the euro and stuck near a 26-year trough against sterling on Wednesday as investors feared that growing US subprime mortgage woes could spread to the wider economy.
The dollar’s broad decline accelerated early in the Asian session, especially against the low-yielding yen, as investors cut back on their exposure to higher-yielding but riskier assets.
The dollar’s sell-off was sparked by a report from credit rating agency Standard and Poor’s that it might downgrade $12.1 billion in subprime-related debt. Subprime loans are extended to borrowers with poor credit.
In Frankfurt, the euro continued its climb against the dollar on Wednesday, heading further into record territory and peaking at US$1.3784.
In Mumbai, the rupee resisted heavy dollar demand and held below 40.40 level against the US currency during morning trading, supported by increasing capital inflow in the country.
In active trade at the Interbank Foreign Exchange (forex) market, the rupee resumed steady at 40.38/40 per dollar from overnight close of 40.3725/3825, but later fell to 40.43 on suspected intervention by the Reserve Bank of India.
The local currency recovered and was quoted at 40.38/39 a dollar in late morning deals.
The RBI reportedly made dollar purchases after resumption of trading in a bid to contain the rupee’s consistent upsurge against the greenback, forex dealers said.
The rupee, however, resisted to the pressure, drawing support from heavy foreign investment flows, they added.
Escalating subprime mortgage problems drove US share prices down the previous day, squeezing investor ability to take risks.
“Market participants will continue to watch developments in the US stock market closely,” said Hideki Hayashi, a global strategist at Shinko Securities in Tokyo.
“The dollar could fall below 120 yen if worries about the stock market grow, boosting market volatility,” Hayashi said.