• Home ::
• Fundamental ::
• Market View ::
• Forex News

• Send
• Print
• Add To
• Rss

Forex News

51e3afa5-ccd4-432c-9db9-b8993365173c

0

0

Insecurity points to weaker USD

Thu, Sep 18 2008, 07:04 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

Swiss franc : return of the “safe haven”?

Yen appreciating fast – for how long?

US dollar

Right now, it is hard to ascertain which determinants are driving the EUR/USD exchange rate. Until recently, it was the oil price, even though the relationship between low oil price and firmer USD was not completely plausible.
Accordingly, this negative correlation ended when it became known that the US investment bank Lehman Brothers had filed for Chapter 11 and the US insurance company AIG was in dire need of capital. The USD slipped even when oil price dropped from USD 97 to USD 90/ barrel. The reason for this was that hurricane IKE had caused less damage to the oil rigs in the Gulf of Mexico than had originally been feared.

However, the US dollar had weakened even before these events. EUR/USD dropped below the mark of 1.4, but then reversed 180° afterwards. It seems as if the prevailing insecurity regarding the US financial sector will probably continue, even considering that AIG was “saved” yesterday. Therefore, for now we expect the USD to weaken further. Contrary to market expectations the FOMC left the key rate unchanged at 2% at yesterday’s meeting. Due to the turbulences on financial markets, expectations for a rate cut had emerged after the weekend. Not only did the FOMC disappoint these expectations, but the outlook was also left more or less unchanged versus the previous meeting in the following press release. After the rate decision the Fed together with the US Treasury agreed on USD 85 bn credit line for AIG. We think it was the right decision by the FOMC not to change the rates as the problem of financial markets is not the interest rate level but the uncertainty. In reacting to recent developments reasonably, the FOMC restored some confidence, at least for the time being.

Swiss franc

“The franc has lost some of its status as a safe haven currency and did not react to the last downward movements on equity markets. If this is now true more generally, and what would happen in case of a serious financial market downturn, remains an open question - we think that, in the case of extraordinary events, the safe haven status would rapidly return.”

What had sounded like a remote possibility two weeks ago has recently become reality: the precipitancy of events concerning Lehman, Merril Lynch and AIG caused the Swiss franc to appreciate rapidly. It gained 3% vs. the EUR in one day, but retreated since as markets calmed down a bit. We still think that the period of possible turmoil is not completely over and assess the risk to our forecasts as higher than usual.

Japanese Yen

“A EURJPY reading as of the beginning of the year seems unlikely, from our point of view, but serious financial market turbulence could provoke such a move.”
Turbulences referred to above have also strongly affected the yen and it hit levels not seen since 2006. The last movement was a real yen firming, as USDJPY dropped to 103.8. In this case as well, we believe that the exchange rate depends heavily on the insecurity prevailing on the financial markets and that this will be decisive as to how fast the yen will return to its long-term trend. Overall, we see a significant risk that ongoing market turmoil leads to a firmer yen.

• Download Full Forex News

Published on  Thu, Sep 18 2008, 10:58 GMT