UPDATE: Yen Benefits Most On Unwind, Dlr Lower On Fed Cut

 
   By Riva Froymovich 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--The yen is higher against the euro and dollar Wednesday, despite the coordinated rate cuts by central banks, but the euro is slightly stronger than the dollar.

The yen is being supported by the massive liquidation of yen-funded bets in markets previously deemed safe from an isolated U.S. credit crunch. The liquidation comes now that it's clear the crisis has spread through Europe to Asia and many economists are forecasting a global recession in 2009.

The dollar has been gaining on the same flows for the last two months.

Traders fund investments in these currencies because of their lower rates, and because many assets are denominated in dollars. When flows reverse, riskier currencies decline against the yen and dollar, which has helped both earn the moniker of "safe haven."

However, the euro is higher Wednesday after the Federal Reserve, Bank of Canada, Bank of England, European Central Bank, Swedish Riksbank and Swiss National Bank made coordinated emergency rate cuts. The actions boosted higher-yielding currencies, such as the euro. The lack of participation by the Bank of Japan is helping the yen make more significant advances Wednesday.

Nevertheless, the overall theme remains in place and market uncertainty is keeping currency analysts on the side of the dollar.

"At first blush, while this is a big step, it is unlikely to prove sufficient to stem the rot," said Marc Chandler, global head of foreign exchange at Brown Brothers Harriman in New York. "Additional rate cuts are likely and further measures to inject liquidity and re-capitalize banks are needed."

Geoffrey Yu, a currency strategist at UBS in London, said the market "cannot discount the recent run of weak fundamental data across major economies and consequent de-leveraging.

"We continue to favor the dollar, yen and Swiss franc as repatriation flows continue and maintain a cautious view on the euro and sterling," said Yu.

The yen was also buoyed overnight as investors in Asia exited equity markets in the the biggest one-day percentage drop on the Nikkei since October 1987. As a result, the dollar fell to its lowest level since last March to Y98.60. The euro also declined to Y134.15, its lowest level since August 2005, from an intraday high of Y138.83.

Wednesday morning in New York, the euro was at $1.3652 from $1.3619 late Tuesday, while the dollar was at Y100.07 from Y101.27, according to EBS. The euro was at Y136.57 from Y137.90. The U.K. pound was at $1.7340 from $1.7474, and the dollar was at CHF1.1330 from CHF1.1375 Tuesday.

The euro is under additional pressure Wednesday after the Department of Energy's latest oil inventories data led to a fall in crude oil futures. Lower oil prices damp inflation expectations, which could lead the ECB to lower interest rates more, triggering a euro sell-off.

-By Riva Froymovich, Dow Jones Newswires; 201 938-5063; riva.froymovich@dowjones.com

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(END) Dow Jones Newswires

October 08, 2008 11:18 ET (15:18 GMT)


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