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Dlr, Euro, Sterling Fall Sharply Vs Yen As Risk Trades Unwind

 
   By Riva Froymovich 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--The dollar and euro extended their earlier declines against the yen Wednesday morning following comments from U.S. Treasury Secretary Henry Paulson and a decline in U.S. equities markets.

The euro and dollar fell sharply to fresh two-week lows of Y120.01 and Y96.0, respectively.

Paulson signaled that the government is ready to enter the second phase of its $700 billion bailout plan, but it is unlikely to include the original proposal to buy up troubled assets from the balance sheets of banks.

Instead, Paulson pointed out that the non-bank consumer finance sector is facing considerable challenges, which is raising the cost and reducing the availability of car loans, student loans and credit cards. He said Treasury is looking at ways to possibly use the financial-rescue program funds to encourage private investors to return to that troubled market.

The Dow Jones Industrial Average slid, and was recently down nearly 300 points. Retailer Best Buy Co.'s (BBY) sales and profit warning heightened worries about consumer spending, and commodities stocks sold off with oil on signs that demand is waning worldwide.

Consumer spending is the lifeblood of the U.S. economy, which remains the heart of the global economy. Mounting fears are putting pressure on risk sensitive currency pairs: the euro against the yen and against the dollar, the U.K. pound against the yen and dollar and the dollar against the yen.

"We just see a massive sell-off in the risk trades," said John McCarthy, manager of currency trading at ING Capital Markets in New York. "When we see this irrespective of equity market activity, it tells you 'real money' has got leverage to unwind."

The "real money" are people moving their own funds, as opposed to borrowed money, including mutual funds, insurance companies or exporters.

Others also point to the Nov. 15 deadline for many hedge-fund clients to ask for year-end redemptions. Once this deadline passes, the pressure on hedge funds to sell assets to raise money for redemptions could ease.

The U.K. pound also extended its overnight decline sparked by the Bank of England's quarterly inflation report. It fell as low as $1.5084 recently, its lowest level since June 2002.

Wednesday morning in New York, the euro was at $1.2510 from $1.2539 late Tuesday, while the dollar was at Y95.61 from Y97.80, according to EBS. The euro was at Y119.55 from Y122.65. The U.K. pound was at $1.5115 from $1.5419, and the dollar was at CHF1.1832 from CHF1.1871 Tuesday.

The Bank of England said in its report that the inflation rate will fall "well below" the government's 2.0% target in the medium term if the benchmark interest rate remains at 3.0%.

The cut in the inflation forecast is the largest on record, BOE Governor Mervyn King said. He also said that the Monetary Policy Committee is prepared to cut interest rates again, following last week's 150-basis-point cut in the benchmark rate, but that the BOE has no wish to see sterling fall particularly sharply. He added that the U.K. gross domestic product is almost certain to fall in the third and fourth quarters.

Meanwhile, the U.K.'s claimant count jobless figure rose at its fastest pace for nearly 16 years in October and looks set to rise further, according to data released Wednesday by the Office for National Statistics.

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

(Maya Jackson Randall in Washington contributed to this report.)

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(END) Dow Jones Newswires

November 12, 2008 11:05 ET (16:05 GMT)


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