Tokyo: The dollar fell to a four-month low against the yen as investors fled risky positions after U.S. lawmakers refused to pass a $700 billion bank bailout plan, sparking the biggest Wall Street stock sell-off since 1987.
But the dollar quickly recovered losses against the yen, with some Japanese institutional investors buying dollars as they prepared to close their books for the April-September first half of the financial year.
The U.S. House of Representatives on Monday unexpectedly rejected a plan to buy toxic assets from struggling banks in an effort to revitalise strained lending markets.
The move hit the dollar by dashing hopes for a comprehensive solution to the credit crisis that has claimed a variety of major financial institutions such as Lehman Brothers this month, stirring worries of a deeper economic downturn.
“There are many dollar-selling factors such as a slowing economy, possible Fed rate cuts and the outlook for worsening fiscal conditions for the U.S. government as it is expected to spend money to rescue banks,” said Osamu Takashima, chief currency analyst at Bank of Tokyo-Mitsubishi UFJ.
But the euro and sterling have also suffered as banks in Europe succumb to the widening crisis fallout, prompting investors to rush for currencies seen as a safe-haven during the turmoil, such as the yen and Swiss franc.
“The simple way to understand all the developments is that the yen is an alternative choice as safe-haven, with the euro and dollar shunned due to the credit crisis,” said a senior trader at a Japanese trust bank.
The U.S. lawmakers vote against the bailout package caused a panic among investors, with the Dow Jones industrial average suffering its biggest one-day point drop ever. Asian markets tumbled as well, with Japan’s Nikkei average falling nearly 5%.
The dollar struck a four-month low of ¥103.50 on trading platform EBS before recovering to 104.11 little changed from late U.S. trade on Monday.
Despite the dollar’s recovery, traders expect the U.S. currency to weaken against the yen as risk aversion is expected to spread after trade moves to Europe and the United States.
The dollar is also vulnerable because more investors are betting the Federal Reserve will cut interest rates from the current 2% in an effort to limit the economic fallout from the worst financial crisis since the Great Depression.
The dollar fell 4.3% against the yen during September, when problems in the U.S. financial sector went from bad to worse.
Earlier this month, the U.S. government took control of troubled mortgage finance giants Fannie Mae and Freddie Mac and bailed out insurer AIG while Lehman Brothers filed bankruptcy.
The euro fell 0.6% to $1.4352 The single currency is now 2.2% below where it ended August.
The euro was down 0.6% at ¥149.50 and fell back near a two-year low hit earlier in month.
On Monday, the credit crunch claimed several new victims — Wachovia Corp as well as many European banks — showing the financial crisis is spreading from the United States to Europe.
At least five banks in Britain, Belgium, Russia, Iceland and the United States were rescued by authorities over the weekend, prompting mammoth injections of cash into the global banking system by central banks to relieve frozen money markets.
But interbank rates stayed painfully high, showing the efforts of global central banks have not succeeded in easing credit tightness.
“Funds are not reaching financial firms that need money as a sense of panic continues to dominate markets,” a trader at a big Japanese bank. “It is reaching a point that financial markets, including the forex market, are not functioning.”