Auto bailout collapses; Japanese intervention prospects eyed
LONDON (MarketWatch) -- The U.S. dollar tumbled to a 13-year low versus the Japanese yen Friday and fell against most major currencies after a $14 billion loan package for the auto industry collapsed in the U.S. Senate.
The dollar dropped as far as 88.38 yen in Asian trade, according to FactSet. Dealers said the dollar sank as low as 88.10 yen on some platforms, its lowest level since August 1995.
"It's a risk-appetite trade. There isn't much risk appetite, and when that happens the yen tends to go up," said Russell Jones, head of fixed-income and currency strategy research at RBC Capital Markets.
The greenback subsequently trimmed losses but remains significantly lower at 90.26 yen, down from 91.64 yen in North American trade late Thursday. Dealers said fears Japanese authorities could intervene to stem the yen's tide prompted short-covering on dollar/yen trades.
Asian stock indexes tumbled, underscoring high levels of risk aversion. See Asia Markets.
The yen has rallied amid global financial and economic turmoil as traders steer clear of riskier assets denominated in higher-yielding currencies.
"If the bearishness in the equity market continues into next week I think the dollar/yen will test 85," said Masafumi Yamamoto, a foreign-exchange strategist with Royal Bank of Scotland in Tokyo.
But with the Japanese economy also in recession, the yen's strength increasingly raises the prospect of intervention by the Bank of Japan, analysts warned.
Remarks by Japanese officials, however, appeared ambiguous about the possibility of near-term action.
Finance Minister Shoichi Nakagawa played down the prospect of near-term intervention, news reports said, saying "for now, we aren't considering such a move."
"Of course, if the foreign-exchange market moves become more volatile, we are going to consider what we should do," Nakagawa said.
Strategists at KBC Bank in Brussels said ongoing deterioration of the global financial and economic picture would likely continue to bolster the yen.
While they're reluctant to add to yen exposure at current levels, selling dollar/yen on upticks "still looks the most valuable approach," they wrote.
The dollar was mixed against most other major counterparts Friday.
The dollar index a measure of the greenback against a trade-weighted basket of six currencies, traded at 83.89, little changed from its level late Thursday.
The euro traded at $1.3367 versus the dollar, up slightly from $1.3314.
The British pound slipped to $1.4972 from $1.5003.
The dollar has retreated nearly 5% from its autumn peak. The greenback had rallied sharply since summer as global financial turmoil sparked liquidation, repatriation and safe-haven flows.
Like the yen, the dollar has tended to rise in line with risk aversion levels and fall when risk appetite has revived.
But the dollar's recent performance, including a sharp selloff Thursday despite the lack of a convincing equity rally, has raised questions about the durability of that pattern.
Thursday's euro rally raised the possibility that foreign-exchange markets were "responding to a change in sentiment toward the greenback," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
But RBC's Jones said the dollar still appears capable of benefiting from rises in risk aversion.
"It's maybe not as strong as it was, but it's still a dominant theme," he said.
There are questions, however, about how long the pattern can hold up.
"At some stage the markets will wake up to the difficulties the U.S. economy is having and the prospect of things like quantitative easing (by the Federal Reserve), and the dollar's going to reverse course," Jones said. "But I don't think it feels like we're there yet."
The British pound, meanwhile, set yet another new all-time low versus the euro. The euro traded as high as 89.40 pence, according to FactSet, and was recently seen at 89.35.
The single currency debuted nearly a decade ago. A move to 90.20 pence versus the euro would be the equivalent of sterling's historic low against the former German D-mark, said strategists at BNP Paribas.
The euro would be likely to "run out of steam" near that area, however, as the single currency "becomes exposed to the deteriorating picture in Europe, which will be amplified by the lack of a coordinated and coherent policy response" by European leaders, they wrote.
