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Wednesday, October 8, 2008

US dollar strengthening

It is likely to be strong for the next few months

The US dollar seemed to have re-established its dominance against most currencies amid a widening global financial crisis as cautious investors de-leveraged, unwound carry trades in other currencies and found renewed comfort in the greenback, analysts said.

The euro fell to US$1.3551 yesterday, a 13-month low, as the crisis in Europe’s banking sector deepened.

Investor jitters, meanwhile, continued to spread to emerging and Asian markets.

The ringgit was weaker against the US dollar at 3.4885 yesterday from 3.4660 last Friday while the South Korean won tumbled 3.6% to 1,269 against the US dollar.

The Indonesian rupiah dropped 1.5% to 9,575 and the Philippine peso lost 0.8% to 47.44.


Citigroup Global Markets analyst Kit Wei Zheng noted that the euro’s weakness over the past week suggested that market attention was now on the financial crisis in Europe, which might rival the US crisis in terms of severity in some areas.

“In the current environment of heightened risk aversion, we can expect further unwinding of carry trades,” he said.

“Therefore high yielding currencies such as the Aussie dollar is forecast to weaken significantly, while funding currencies such as the Japanese yen would tend to outperform.”

Japan’s currency was the best-performer in September and the only currency to appreciate against the dollar.

Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong observed that the US dollar’s decline had gained pace when the US subprime crisis first surfaced last year.

“However, as the crisis spread to Europe and possibly other parts of the world, investors have begun to perceive the US as being ahead of the curve and reverse their earlier shifts of funds to other currencies,” he said.

Jupiter Securities research head Pong Teng Siew said the de-leveraging by fund managers and investors had also helped strengthen the US dollar as investments were turned into dollar assets.

He expected the US dollar to continue to strengthen in the next two to three months as the de-leveraging process continued.

OCBC Bank (M) Bhd treasury head Gan Kok Kim said that apart from liquidity issues, concerns over a “fundamental” econmic slowdown were likely to remain the other key driver for currency markets this week.

“Yesterday, risk aversion and the flight out of the majors in favour of the US dollar continued to prevail,” Gan said.

“We think the current move in the currency markets may have legs yet, given that the scramble for dollars and systemic and counter-party risks take precedence over relative fundamentals for now.”

In the near term, Gan expected the US dollar and yen to strengthen, with other Asian currencies to depreciate.

“The US dollar is anticipated to benefit on the back of slowing growth and easier central bank policies while on the Asian front, Asian currencies may continue to see downside pressure in the coming months if the global economic slowdown impinges on the export-reliant region,” he said.

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