Crashing US dollar plumbs new depths

Crashing US dollar plumbs new depths

 

Greenback hits all-time low against S$ and falls against yen, euro as further rate cuts loom

 

By LARRY WEE

 

(SINGAPORE) An overnight relapse on Wall Street dealt the besieged US dollar another deadly blow yesterday, forcing it to a fresh all-time low of S$1.3791 and 1.0047 Swiss francs in Asian trading yesterday, while lifting the euro to another fresh peak of US$1.5624.

 

And by yesterday afternoon, the greenback had recorded its worst showing of the day versus the Japanese yen, tumbling more than 3 per cent to a session low of 99.77 yen – its weakest showing in more than a dozen years.

 

Traders reportedly gave the US dollar the thumbs down yesterday after Tuesday’s impressive relief rally on Wall Street – after the US central bank’s latest US$200 billion liquidity assistance – proved to be very short-lived.

 

Philip Wee, senior currency economist at DBS, who expects the US dollar to finish 2008 closer to S$1.35, explained yesterday: ‘The message provided by the coordinated G-10 central bank liquidity injection this week is clear; problems in the US sub-prime sector have now spread into other areas of the US economy as well as overseas.’

 

JP Morgan currency strategist Ho Yen Ping explained the still-grim outlook for the US dollar from another (related) perspective: ‘While MAS (the Monetary Authority of Singapore) has been sighted in the market to prevent excess volatility, what’s clear in the bigger picture is that the US dollar can’t enjoy much of a turnaround if US interest rates are expected to fall further.’

 

Although JP Morgan is reviewing the Federal Reserve’s expected 0.75 per cent interest rate cut (to 2.25 per cent) next Tuesday, their house view is that short-term US rates are likely to end 2008 still further down at 1.75 per cent. Their year-end target of S$1.36 for the US dollar is also under review for a possible downward adjustment. Both DBS and JP Morgan do not expect MAS to change its currency policy stance for a modest and gradual appreciation of the trade-weighted Singapore dollar or S$NEER when they issue their semi-annual monetary policy statement next month.

 

In practical terms, they suggest that this should translate into trend appreciation of 2.5 to 2.75 per cent per annum for the S$NEER, which has been the main monetary policy tool of Singapore‘s central bank since the 1980s.

 

Elsewhere in Asia yesterday, the US dollar also skidded to new lows of 7.0895 yuan and RM3.1560 – levels not traded since it was de-pegged from both currencies in late July 2005.

 

And with such top gainers – especially the euro, yen, ringgit and yuan – known to contribute some of the heaviest weightings to the S$NEER’s value, it was no surprise that the US currency was also forced to fresh lows versus the local unit yesterday, Sing-watchers explained. Prior to yesterday, Reuters data shows that the US dollar’s low point was S$1.3830 on May 26, 1995.

 

Notably, however, other Asian units known to be vulnerable to risk aversion and high oil prices lost ground yesterday – even against the fast-falling US dollar.

 

News that US light crude had scaled fresh peaks of US$110 a barrel in overnight trading saw the currencies of heavy oil importers like Indonesia, India and the Philippines suffer a relapse in Asia yesterday and, against the Korean won, the US dollar recorded a fresh two-year high.

 

DBS’s Mr Wee suggested that weaker Asian units are starting to feel the fallout from America‘s problems.

 

‘Asian emerging market spreads have exploded this year, and Asian stock markets are falling sharply in tandem with Wall Street too,’ he explained.

 

Such contagion effects may indeed see the US dollar stage some form of recovery in the second quarter, he suggested, before falling back by the end of this year – perhaps rebounding towards S$1.42 before falling back to S$1.35 by December.

 

This assumes that a key S$NEER basket component like the euro will top out at around US$1.5750, said Mr Wee, although others see more upside for the European common currency.

 

Updating their currency forecast yesterday, UK currency research firm 4cast warned: ‘We do not believe that unilateral intervention becomes a serious risk this side of US$1.60 and it could well be US$1.65 before the guns are wheeled in.’

 

And in a client note from New York, RBS Greenwich Capital’s Alan Ruskin predicted: ‘The first half of 2008 will continue to favour selling the currencies that are being forced to give precedence to asset deflation over commodities and goods inflation, (notably the US dollar), and buying the currencies fighting commodities inflation (possibly an Asian basket comprising the Singapore dollar, NT$, ringgit and rupiah) whose asset cycles have not turned.’

 

Source: Business Times

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