The US dollar and yen fell on Monday as the market sought out “safe haven” currencies such as the Swiss franc and euro amid worries over the pace of global growth.
A sharp rotation from equities to the bond market was one sure sign of global investors cutting their exposure to risk. Moreover RBC Capital Markets said its risk aversion thermometer had risen to its highest level since May 2004, and UBS revealed its risk index was moving back to neutral levels from risk-seeking territory.
The fallout spread to the dollar, which has been supported in recent weeks by escalating interest rate expectations.
“The US money market curve has priced in the Federal Reserve hiking rates up to the end of this year to 4 per cent, indicating that the US curve is the steepest among industrialised countries, offering the most flattening potential if growth slows further from here,” said Hans Redeker, global head of forex strategy at BNP Paribas. “Accordingly, the dollar could potentially lose substantial cyclical support.”
Paul Meggyesi, senior forex strategist at JP Morgan, added: “I would characterise the dollar as being a risky asset that will suffer in a defensive climate.
“Capital flows are going to come under strain, and if you have a $50bn-$60bn a month financing requirement, a drying up of flows is in no sense good for your currency.”
The dollar fell 0.9 per cent to $1.3030 against the euro, 0.6 per cent to a four-week low of $1.9045 against sterling and 0.3 per cent to Y107.36 against the yen.
The yen was hurt by a 3.8 per cent tumble in the Nikkei 225 index, prompting fears that any prolonged slide in Asian equities could lead western investors to begin to liquidate their positions.
In contrast the Swiss franc, viewed as a safe bolt-hole in times of global uncertainty, rose across the board, firming 1.3 per cent to SFr1.1856 against the dollar and 0.9 per cent to Y90.50 against the yen. The euro benefited to a lesser extent from the same trend, rising 0.6 per cent to Y139.90 against the yen, with Paul Bednarczyk, currency strategist at 4Cast, seeing evidence of strong Japanese demand for European debt.
A swathe of other cyclical currencies also suffered. With commodity prices likely to suffer from any slowdown in global growth, the Australian dollar tumbled 1.4 per cent to SFr0.9089 against the Swiss franc, a three-month low, while the Polish zloty was typical of eastern European currencies, falling 1 per cent to 4.1853 zlotys to the euro.
Sterling held reasonably firm. Mr Meggyesi argued that traders were unwilling to short the pound amid the prospect of sizeable inward merger and acquisition flows, with Pernod Ricard of France and Fortune Brands of the US reportedly ready to pay £7.4bn for the UK’s Allied Domecq.
Some also attributed dollar weakness to a fresh call from the G7 group of leading nations for “more flexibility in exchange rates”, a thinly veiled call for China to revalue the renminbi.
John Snow, the US Treasury secretary, called on China directly to act amid suggestions that the US expects Beijing to loosen the iron grip on its currency by September’s annual meeting of the International Monetary Fund and World Bank. Such a move would be likely to cause the dollar to weaken.
The discount on one-year non-deliverable renminbi-dollar forwards duly widened by 200 points to 3,850, implying a rate of Rmb7.893 to the dollar in one year’s time, against the current peg of Rmb8.278.
However Paul Chertkow, head of global currency research at Bank of Tokyo-Mitsubishi, doubted China would succumb to G7 pressure while it retained a trade deficit with the rest of Asia.
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