MW: Dollar gains against most rivals; yen is exception
By Polya Lesova & Steve Goldstein, MarketWatch
Japanese yen climbs, while British pound slumps after downbeat data
NEW YORK (MarketWatch) -- The U.S. dollar rose against other major currencies Monday, but fell against the Japanese yen, as investors hunted for safety after downbeat economic data around the world raised economic fears and heightened risk aversion.
The dollar index , which tracks the performance of the dollar against a trade-weighted basket of six major currencies, was up 0.3% at 86.991. The euro fell 0.7% to $1.2610.
On Wall Street, U.S. stocks extended losses, with the Dow industrials losing nearly 680 points. See Market Snapshot.
"There is no question that the meltdown in the equity market single-handedly triggered the sell-off in the currency market today," said Kathy Lien, director of currency research at GFT.
"The flight to safety has led to repatriation back into U.S. dollars even though there is still more trouble ahead for the U.S. economy," she wrote in a note to clients.
The British pound dropped 3.2% to $1.4883 after hitting an intraday low of $1.4805.
But the dollar tumbled against its Japanese counterpart, falling 2.6% to 93.05 yen.
The Bank of Japan decided to call an unscheduled monetary policy meeting Tuesday, the central bank said on its Web site. The purpose of the meeting is to discuss monetary control matters on possible changes in the treatment of corporate debt as collateral and possible ways to enhance flexibility in funds-supplying operations collateralized by corporate debt, the BOJ said.
"The BoJ will discuss measures to ease credit constraints, but might not cut rates. Even so, BoJ Governor Shirakawa has, quite legitimately, become more downbeat on the 'severe state' of the Japanese economy," said David Watt, senior currency strategist at RBC Capital Markets in a research note.
The yen frequently rises when risk appetite falls, as traders buy back low-yielding currencies and pare their bets against higher-yielding ones.
Risk aversion rose after manufacturing gauges in the United States, China, the euro zone and Britain all showed significant drops, with the Chinese and British gauge dropping to record lows.
In the U.S., manufacturing activity declined at the fastest pace in 26 years in November, the Institute for Supply Management reported Monday.
The ISM index fell to 36.2% in November from 38.9% in October. It's the lowest reading since May 1982. Economists were expecting the ISM index to fall to 37%. Readings under 50% indicate most firms reported worsening conditions. See Economic Report.
The U.S. economy entered a recession in December 2007, according to a committee of economists at the private National Bureau of Economic Research. See Economic Report.
The U.S. economy is under "considerable stress," Federal Reserve Chairman Ben Bernanke said at a Dallas Fed conference, and is likely to remain weak for some time. The economy "downshifted further" after the financial crisis of September, he said.
The Fed has lowered interest rates just about as far as they can go, but the U.S. central bank still has plenty of available firepower it could deploy to restore financial markets to normal, Bernanke said.
"At the start of December, the relationship between the low-yielding yen, Swiss franc and U.S. dollar has tightened again due to economic weakness," wrote currency analysts at Brown Brothers Harriman in New York, in a note to clients Monday.
