Dollar sell-off gathers pace!

March 17 2008 - The dollar plunged to record lows against the euro and Swiss franc and its weakest level since 1995 against the yen on Monday as fears over the state of the U.S. financial system sent the currency tumbling.

Analysts said news that Bears Stearns, the U.S. investment bank, had been bought by rival JP Morgan Chase for just $2 a share - far below Friday’s close above $30 a share - had sparked renewed fears over the extent of damage wrought by the credit crisis.

Indeed as speculation swirled that other leading U.S. institutions might be in trouble, the Federal Reserve took more emergency measures to stem the crisis over the weekend.

The Fed cut its discount rate at which it lends to banks and opened up its discount window to major investment banks - a measure not used since the Great Depression of the 1930s.

“As long as the Fed stays on its own trying to calm money markets, the dollar will weaken and work as a catalyst to spread weakness around the globe,” said Hans Redeker at BNP Paribas.

He added: “The longer other central banks stand aside, the bigger the risk that dollar depreciation expectations become deeply rooted.”

The dollar fell to a record low of $1.5904 against the euro and dropped to an all-time trough of SFr0.9637 against the Swiss franc and a fresh 12-year low of Y95.77 against the yen.

However, the dollar was not sold off across the board.

Analysts said the foreign exchange market had reacted as predicted to rising risk aversion, making the yen and the Swiss franc the best performers.

Indeed, the yen rose 1.7 per cent to Y152.70 against the euro and climbed 2.5 per cent to Y194.93 against the pound.

Meanwhile, the Swiss franc gained 1 per cent to SFr1.5480 against the euro and rose 1.7 per cent to SFr1.9790 against the pound.

But analysts said the pronounced risk aversion was focusing demand on fewer currencies, with broad-based dollar selling giving way as investors turned against current account deficit currencies like the pound and the Australian and New Zealand dollars.

Bilal Hafeez, global head of foreign exchange strategy at Deutsche Bank, said that while all eyes were on the funding issues in the credit markets, currency markets also had funding issues.

“Countries are struggling to fund their current account deficits, and are seeing their currencies weaken, while countries with surpluses are seeing currency strength,” he said.

The dollar rose 0.9 per cent to $2.005 against the pound, climbed 1.5 per cent to $0.9230 against the Australian dollar and rose 1 per cent to $0.8050 against the New Zealand dollar.

Meanwhile, the pound fell 0.9 per cent to £0.7886 against the euro, having hit a low of £0.7912 earlier in the session, its weakest level since the introduction of the single currency in 1999.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said that despite the evidence of the dollar performing better against a number of currencies, global authorities were likely to remain concerned over the extent of dollar selling against the euro, Swiss franc and yen.

He said that with the next G7 meeting of central banks and finance ministers not taking place until April 11, a more immediate response was needed to ease investor concerns over the ability of central banks to cope with the current scale of deleveraging in financial markets.

“Some coordinated action to stabilize confidence may well be required over the coming days,” said Halpenny. “If this is not forthcoming then additional sharp declines in the dollar, especially against the yen, are likely.”