Dollar is a trader's refuge as investors seek a safe haven while the Yen slumps

The dollar is approaching a high against the currencies of major U.S. trading partners as the plunge in the yen and Swiss franc leaves the world’s reserve currency the only refuge from economic turmoil. Japan’s crumbling economy combined with an end to the unwinding of the carry trade weakened the yen, last year’s best performing currency, even after a 0.8 percent gain today. The yen has suffered as carry trades finished unwinding, according to Henrik Gullberg, a foreign-exchange strategist in London at Deutsche Bank AG, the world’s largest currency trader. In such a trade, higher-yielding currencies are bought with lower yielders, such as the yen. “There are no alternatives to the dollar right now,” said Geoffrey Yu, London-based strategist at UBS AG, the world’s second-biggest currency trader. “Investors see the rest of the world collapsing, and the yen is no longer a safe haven.” The USD/JPY is currently trading at 97.75 as of 8:30am, GMT.

The UK Chancellor of the Exchequer Alistair Darling forced Royal Bank of Scotland Group Plc to give up the right to claim its current losses against future taxes in the U.K., a potential boost to the Treasury’s finances. The decision will help Prime Minister Gordon Brown confront the biggest budget deficits since modern records began in 1970 as the recession dries up revenue to the Treasury. RBS paid 16 billion pounds of corporate tax from 1998 to 2007, about 80 percent of the cost of its government-funded recapitalization. “This is a sign of things to come,” said Peter Spencer, a former Treasury official now advising Ernst & Young. “The government has got to spend now to keep the wolf from the door, but we’re all trying to figure out when the debt is going to have be paid off.” The GBP/USD is currently trading at 8:50am, GMT.

European shares were set to open sharply lower on Friday, tracking losses in U.S. equities, with investors staying cautious on the last trading day of the month, while weaker commodity prices seen hitting oils and miners. The eye-popping $1.75 trillion deficit forecast by U.S. President Barack Obama also underlined the heavy blow the financial crisis has dealt the world's biggest economy, with serious ripple effects around the globe. Investors will also take note of the news that the U.S. government and Citigroup have reached a deal to convert up to $25 billion in government-held preferred shares in the bank to common equity, a person familiar with the transaction said. The EUR/USD is currently trading at $1.2660 as of 9:05am, GMT.

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