Dollar falls as risk appetite returns

Friday July 10, 2009

LONDON: The dollar and yen both fell on Thursday as investors recovered their appetite for risk and other major currencies recouped some of their losses the day before. Sterling got a boost from a decision by the Bank of England to keep its main interest rate unchanged and hold steady its asset purchase facility despite market expectations that the programme would be expanded. In late London trade, the European single currency rose to 1.4034 dollars from 1.3885 dollars in New York late on Wednesday. The dollar fell to 92.77 yen from 92.86 yen late Wednesday. Mounting uncertainty about prospects for a global economic recovery has in recent days supported the yen, which is seen as a safe haven during times of market turmoil, dealers said. "The huge out performance of the yen during the last week is a clear and screaming sign of risk aversion," said Societe Generale analyst Patrick Bennett. Investor sentiment soured after Group of Eight leaders meeting Wednesday in the Italian town of L'Aquila warned that the World economy was still in danger. In a communique, the G8 nations said there remained "significant risks" for economic and financial stability. During the meeting, China's state councillor Dai Bingguo Thu told leaders that the international currency regime should become more diversified, a Chinese official told reporters. This added to pressure against the dollar, which is the world's biggest reserve currency. Any diversification would reduce demand for the US unit. In other news of interest to the foreign exchange market, leaders are to pledge to abstain from competitive currency devaluations in a joint statement to Thursday. Investors also absorbed news that new claims for US unemployment benefits fell 8.4 percent last week to a six-month low, suggesting some improvement in the troubled job market. The Labour Department said that initial claims for unemployment insurance benefits fell to a seasonally adjusted 565,000 in the week ended July 4. In Britain, the Bank of England surprisingly decided against pumping billions of extra pounds into money markets to boost lending on Thursday, as it kept its key interest rate at a record-low 0.5 percent. While the rate decision was widely expected, many economists believed the BoE's Monetary Policy Committee would announce plans to create an extra 25 billion pounds (28.9 billion euros, 40.4 billion dollars) under its quantitative easing (QE) scheme. "The Bank's decision not to inject further money into its quantitative easing programme has caught the market off guard and the relief has helped return short-term confidence in sterling," said Mark O'Sullivan at Currencies Direct. Under QE a process which amounts to creating new money the British central bank buys government bonds from commercial banks in the hope that the institutions will lend once again to businesses and individuals. In London trade Thursday, the euro was changing hands at 1.4034 dollars against 1.3885 dollars late on Wednesday, 129.50 yen (128.96), 0.8608 pounds (0.8642) and 1.5127 Swiss francs (1.5132). The dollar stood at 92.77 yen (92.86) and 1.0835 Swiss francs (1.0895). The pound was at 1.6217 dollars (1.6063). On the London Bullion Market, the price of gold fell to 911.75 dollars an ounce from 918 dollars an ounce late on Wednesday. (AFP)