Dollar Mixed on Uncertainty over Credit Storm

The dollar rose against the euro but slipped against the yen Thursday as fears about the credit crunch's impact and falling equity markets led investors to pare back on profitable but extended trades.

Dollar and Yen
Dollar and Yen

Uncertainty about the extent of the damage from the U.S. subprime mortgage crisis continued to pervade markets. Standard & Poor's cut its long-term rating on Bear Stearns as the company prepares to report its first-ever quarterly loss, while General Electric (GE is the parent company of CNBC)said Wednesday its short-term bond fund had run into trouble and all its outside investors have liquidated their holdings.

Continued nervousness about the environment for lending has caused some dealers to trim their bets against the dollar and to reduce yen carry trades, in which the low-yielding Japanese currency is borrowed to fund purchases of higher-yielding ones.

"Risk aversion remains the guiding principle in foreign exchange markets today, with further financial-sector write-downs negatively impacting stock market performance," said Michael Woolfolk, senior currency strategist with The Bank of New York Mellon.

"Declines in equity prices are keeping yen carry trades sidelined, with the greenback on the receiving end of a mild safe-haven bid," Woolfolk said in a note.

The dollar was down on the day against the yen, within sight of 18-month lows of 109.10 yen set earlier this week.

The euro was steady versus the dollar, more than a cent from a record high of $1.4752 hit last week, according to Reuters data.

"If we see the market take the euro below $1.45, then the euro will drift to the $1.43-to-$1.42 range," said Adam Hewison, president of in Shady Side, Maryland. "Overall, the market looks like it's overdone on dollar selling."

Against the yen , the euro was down.

The high-yielding Australian dollar fell against the greenback, as did the New Zealand dollar .

Sterling fell to a three-week low against the dollar, hit by an unexpected fall in retail sales data.

A currency dealer with a Dutch bank said many other traders are watching the pound continue to drop sharply from 26-year highs above $2.1100 reached last week, and getting nervous about locking in profits before the end of the year.

High-yielders like sterling and the New Zealand and Australian currencies could see further losses as a result of hedge fund withdrawals, according to some analysts.

Investors have to give 45 days' notice if they want to withdraw cash from hedge funds, meaning that those who want to close their positions by year-end have to say so now.

"Clients may take some money off the table as was the case in Q3 when Aug. 15 was marked with massive selling across all equity indices," said Ashraf Laidi, chief FX analyst at CMC

Markets U.S. "In this case, we expect renewed rallies in the yen crosses and for the Aussie, kiwi and loonie to come under pressure."