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Daily Analysis

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Worries over global recession, credit markets remain bearish, Yen rises

Thu, Nov 20 2008, 11:04 GMT
by Benny Menashe

Finotec Group Inc.

Risk aversion kept the yen and the dollar firm on Thursday as global recession worries and credit jitters fuelled by uncertainty over the struggling U.S. auto industry led investors to cut risky assets. Yen-buying gained steam in the afternoon as a slide in the Nikkei share average accelerated, with Japan's benchmark index tumbling 6.9 percent.

Equities are regarded as a barometer of investor risk appetite and their declines can trigger unwinding of carry trades, which involve selling low-yielding currencies like the yen to invest in higher-yielding currencies and assets.
Nowadays when the Nikkei fell more than 400 points, yen-buying accelerated, with recent weak U.S. economic data, uncertainties about rescue measures for U.S. automakers and worries about a further fall in the Dow, demand for the Japanese currency will likely increase further on risk aversion.

U.S. and European stocks fell to their lowest levels in 5-½ years on Wednesday as prospects faded for a Washington bailout of the auto industry and data showed U.S. consumer prices dropped at a record pace in October. The dollar may be vulnerable against the yen due to deepening concerns about U.S. corporate earnings and expectations the Federal Reserve will cut interest rates from the already low 1 percent at a meeting next month. But the dollar was seen as likely to be supported against other currencies due to general risk aversion triggered by falling stocks and growing uncertainty over whether U.S. automakers, including General Motors, will win emergency government loans. The top three U.S. carmakers have warned that bankruptcy for one or more of them would lead to massive job cuts.

Market players expect the Bank of Japan to mull more steps to soothe frazzled money markets at a two-day policy meeting that ends on Friday. But the central bank is expected to keep interest rates steady at 0.30 percent. Analysts said the outcome of the BOJ meeting may not offer much incentive to the market as the focus is more on moves by the Fed and central banks in Europe. Minutes on Wednesday from the Fed's meeting last month added to the bleak global economic view, as the central bank said U.S. economic data in the run-up to the December meeting would show significant weakness and could well mean that another rate cut may be needed.

Today's Economic Events

Published on  Thu, Nov 20 2008, 11:08 GMT