WSJ:WORLD FOREX: Traders Jumpy As Euro Crisis Sparks EM Flight
-- Market super-sensitive to any and every euro-zone headline
-- Dollar main beneficiary, emerging market currencies finally react to souring sentiment
-- Fear that liquidity could dry up pushing traders to highly liquid dollar
-- US retail sales at 1230 GMT eyed
By Jessica Mead
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Rattled currency dealers sought refuge in traditional safe havens such as the dollar and Japanese yen in European trade Wednesday as the euro-zone debt crisis continued to nag and the reverberations spread to emerging markets.
The credit rating downgrade of French banks Societe Generale SA (GLE.FR) and Credit Agricole SA (ACA.FR) by Moody's Investors Service Inc. hit the euro in early trade. But positive noises from the French government and comments by European Commission President Jose Manuel Barroso on the options for the introduction of common euro-zone bonds helped it back above $1.37 against the dollar, underlining the market's jumpy mood.
"The market remains hyper-sensitive to almost every headline and rumor masquerading as fact about the euro zone. This has led to erratic price action," Citigroup analysts wrote in a note to clients.
Emerging market currencies such as the Hungarian forint and the Indonesian rupiah suffered badly from the overall flight to quality. The Hungarian forint sank as much as 1.3% against the euro while the Indonesian rupiah weakened by as much as 1.8% against the dollar at one point.
"[They] are finally reacting to global risk aversion, reduced liquidity, slower growth and contagion of the European crisis," said Kit Juckes, chief currency strategist at Societe Generale.
"The flight to quality will mean the dollar gets a bid and everything else gets smashed, especially the likes of the Hungarian forint," added a London-based trader, who declined to be named.
With the Swiss franc out of action, due to a formal ceiling placed on the currency, and a perennial risk of intervention by Japanese authorities, investors seeking a safe haven among the major currencies have little choice but to buy dollars.
"What is underlying all of this is the fear that liquidity could dry up in the way that happened after Lehman Brothers. And the key benefit that the dollar has over other currencies is liquidity," said Jane Foley, senior currency strategist at Rabobank in London.
"The euro-zone crisis is the number one fear that puts almost everything else in second place. The tensions if anything are going to intensify over the next three months. People right now are going to want dollars," she added.
Next up, U.S. August retail sales at 1230 GMT.
At 1046 GMT, the euro was trading at $1.3715 against the dollar, compared with $1.3678 late Tuesday in New York, according to trading system EBS. The dollar was at Y76.81 against the yen, compared with Y76.93, while the euro was at Y105.35 compared with Y105.20. Meanwhile, the pound was trading at $1.5794 against the dollar, compared with $1.5785 late Tuesday in New York.
The ICE Dollar Index, which tracks the greenback against a basket of currencies, was at 76.958 compared with 77.067 late Tuesday in New York.
