Dollar Falls vs. Yen as Risk-Taking Eases

The dollar fell against the yen but held steady versus the euro Monday as global stock losses and high oil prices stoked uncertainty about the health of the U.S. economy and left investors wary of risky trades.

Dollar and Euro
Dollar and Euro

Talk that Middle East oil exporters could next month discuss ditching their fixed exchange rates to the dollar also added to negative greenback sentiment, as did continued market expectations for lower U.S. interest rates.

But investors' increasing aversion to risk helped keep the dollar steady against the euro and a basket of major currencies as investors repatriated money from risky overseas trades.

Investors grew particularly cautious after Goldman Sachs added U.S. banking giant Citigroup to its "sell" list, saying it would likely face more mortgage-related losses next year.

"Uncertainty is swirling around markets and people fear the Fed will cut interest rates again because it is concerned about the possibility of a U.S. recession," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington, D.C.

"With that backdrop, investors are going to move out of equity positions and out of risky investments in general."

Midmorning in New York, the dollar fell 0.7 percent to 110.10 yen, inching back toward an 18-month low of 109.12 yen hit last week. Salvaggio said traders could test support around that level over the next few sessions.

Yen buying mirrored weakness in the major U.S. stock indexes, all of which had lost more than 1 percent by midmorning. European equities also fell 0.7 percent, hit by weakness in financial shares.

The greenback also hit a 12-year low of 1.1155 Swiss francs. A fall beneath 1.11 would mark a record low.

Both the yen and Swiss franc gain when investors shed risk because the low-yielding currencies are often used to finance purchases of higher-yield -- and higher-risk -- assets.

The high-yielding Australian dollar (AUD-), on the other hand, shed 0.7 percent against the greenback.

The euro fell 0.7 percent to 161.40 yen but was little changed against the dollar .

Most analysts expect dollar pressure against the euro to pick up again, as the greenback faces a number of headwinds.

Policy-makers from 20 industrialized and developing economies did not single out the dollar at a weekend meeting in South Africa. But markets expect dollar weakness and inflation to soon force Mideast oil exporters to stop pegging their currencies to the greenback.

Kuwait made that move earlier this year, and the United Arab Emirates said last week it may follow suit. The Gulf Cooperation Council, which also includes Saudi Arabia, Qatar, Oman and Bahrain, is expected to review currency issues at a Dec. 3-4 meeting.

Also, delegates at a weekend meeting of the Organization of the Petroleum Exporting Countries clashed over whether to consider pricing oil against a basket of currencies to counter a weak U.S. dollar.

Were OPEC to quit pricing oil in dollars, markets would likely sell greenbacks for fear exporters would shift some foreign exchange reserves out of the U.S. currency.

"All of this leaves the dollar rather vulnerable to further falls over coming weeks," Calyon strategists said in a research note forecasting the euro would reach $1.50 by year-end.

Some Federal Reserve officials have stressed inflation risks to the U.S. economy, but markets still widely expect the central bank slash 4.5 percent benchmark rates by a quarter percentage point at its December meeting.

"Are there inflation fears in the United States? Yes. But as long as housing remains a downside risk, people will think the Fed is biased to cut rates in the near term," said David Watt, currency strategist at RBC Capital Markets in Toronto.