Tokyo: The dollar clawed up from near a record low against the euro on Monday as market players trimmed some of their hefty bets against the US currency, even as the US economy’s troubles keep investors sour on US assets.
The dollar recovered slightly after sliding towards $1.50 to the euro last Friday as traders covered short positions, but analysts said the market was likely to try to push through that level.
Investors remain on edge about more fallout from the credit crunch as year-end approaches and potentially forces investors to dump assets or scramble for cash to get their books in order as banks and funds grapple with the market strains.
“There’s definitely a lot of negative articles around about the subprime issue, so it’s hard to say the dollar is out of the woods at this stage,” said Rick Lloyd, head of G10 currency trading at ABN AMRO in Singapore.
The yen edged away from a 2-1/2-year peak against the dollar as stronger equity markets spurred some market players to tiptoe back into carry trades, which involve borrowing the low-yielding Japanese currency to buy higher-yielding currencies.
Japan’s Nikkei average climbed 1.3% and rebounded from a two-year low after solid gains on Wall Street on Friday. South Korea’s KOSPI gained more than 3 %.
The worsening credit crunch and the hit to stocks have driven the yen higher as market players rushed to reverse carry trades.
The worries about the US economy and expectations for repeated Federal Reserve rate cuts have caused the dollar’s broad tumble to accelerate against low-yielding currencies such as the yen and Swiss franc.
The dollar edged up 0.4% from late US trade to 108.74 yen after having slid as far as 107.55 yen on Friday, the lowest since June 2005.
So far in November the dollar has dropped nearly 6% against the yen and is poised for its biggest one-month fall since March 2000. The euro dipped 0.2% to $1.4813 after having pulled back from the record peak of $1.4968 struck on Friday when moves were exaggerated by thin trading on a market holiday in Japan and following the US Thanksgiving holiday.
Gauges of financial risk remain elevated and underscore the market strains as 2007 comes to an end.
Implied volatility on one-month dollar/yen options is near 15%, staying elevated after spiking to a decade-high above 22% in August.
The spread on two-year US interest rate swaps — a measure of financial system risk — was near 95 basis points after having widened to a record beyond 100 basis points last week.
“Credit market headlines, including additional write-downs due to subprime losses and liquidity issues into fiscal year-end, will continue to dominate this week,” said currency strategists at RBC Capital Markets in a research note.