Tokyo: The dollar was weighed down in Asian trade Tuesday, 20 November, after bad news from the banking sector hit investor confidence over the outlook of the US economy, dealers said.
After a sharp fall overnight, the dollar edged up on a technical rebound to 109.85 yen in Tokyo morning trade from 109.74.
The euro slipped to $1.4642 from $1.4665 in New York late Monday and to 160.83 yen from 160.96.
Market players were squaring positions on a thin week on the economic calendar ahead of a long holiday weekend. Financial markets will be closed on Thursday in the US and on Friday in Japan.
Currency markets were pummeled after a slew of negative reports in the banking sector on Monday shook investor optimism, prompting players to rush to safe havens including the low-yielding yen and the Swiss franc, dealers said.
“Markets have been very sensitive to a bunch of negative news from the US, forcing investors to shun risk and instead hedge their positions,” said Hideaki Inoue, chief forex strategist at Mitsubishi-UFJ Trust and Banking Corporation.
Goldman Sachs on Monday in a note recommended a sell order for banking giant Citigroup, citing an expected $15 billion write-down in its next fiscal quarter due to its exposure to the subprime mortgage crisis.
Goldman Sachs also downgraded the number two US home-improvement retailer Lowe’s on concerns over further deterioration in the housing market, causing concern that consumption could be slowing.
Other bearish news included a Credit Suisse report that said government-sponsored mortgage firm Freddie Mac could report losses of up to $5 billion on its subprime portfolio.
Meanwhile the National Association of Homebuilders, a private trade group, said its housing sentiment index in November remained at a record low, exacerbating fears that credit market troubles are far from over.
Market players had their eyes turned to minutes of the October meeting of the Federal Open Market Committee to be released on Wednesday to look for clues on the Fed’s rate move next month.
The US central bank cut rates twice since September in an attempt to appease distressed financial markets and prevent the US economy from stalling, but the outlook has beem muddled by sturdy inflation.
Fed officials including William Poole and Randall Kroszner recently downplayed the likelihood of a rate cut at the Fed’s December 11 meeting.
“The Fed and the money markets are staring each other down and the question is who will blink first,” Thomson IFR analyst John Noonan said.
“The market feels that the Fed has no choice and by continuing to price in an easing it will force the Fed’s hand. If the Fed decides to dig their heels in it would upset an already fragile Wall Street and lead to more carry trade unwinding,” he said, referring to falling back on low-yielding currencies.
However, some investors think the dollar is undervalued and expect trade to rebalance itself.
“Although negative news is pushing down the dollar, trade is too lopsided. I think that momentum for the dollar to bounce back is slowly piling up and we can expect a rally momentarily,” said Mitsubishi-UFJ’s Inoue.