Forex - Dollar firms as risk aversion continues to rise

Forex - Dollar firms as risk aversion continues to rise

	Published : Tue, 16 Oct 2007 09:23 By : Agencies Print this Story

LONDON (Thomson Financial) - The dollar came off earlier lows, with the rise in risk aversion providing the US currency with support, offsetting negative comments on the currency yesterday from the outgoing head of the International Monetary Fund.

Major global equity markets closed down yesterday, and markets in Europe this morning have all opened lower. This has led to support for the dollar as investors opt to buy safe-haven assets such as US Treasuries.

The greenback has also gained a boost from comments by European Central Bank President Jean-Claude Trichet who reiterated previous statements that US authorities want a strong dollar. Trichet also said that the Chinese yuan should be allowed to appreciate, boosting expectations that exchange rates will be on this weekend's G7 meeting agenda.

'The heat has been turned up again ahead of a G7 meeting and although history has taught us not to expect much in the way of Forex initiatives, the market is duty bound to prepare for the unexpected,' said Peter Stoneham at Thomson IFR Markets.

Adding to this support were comments overnight from Federal Reserve Chairman Ben Bernanke who said that the Fed would be prepared to reverse its recent cut in interest rates if inflationary pressures rise.

All this has helped the dollar shrug off comments from the IMF's Rato, who said the greenback is 'overvalued.'

In a news conference in Washington Monday, outgoing IMF head Rodrigo de Rato said there is still 'room for further depreciation' of the dollar.

'And if you look at the futures markets, you will see that the markets are also seeing more or less the same,' said de Rato.

Whether the dollar can sustain this morning's gain against the euro could hinge on euro zone inflation figures and Germany's ZEW economic expectations index, both due out at 10 am BST.

Eurostat is expected to confirm that euro zone inflation accelerated to 2.1 pct in September from 1.7 pct in August, firming expectations that the ECB remains in tightening mode. However this could be offset if the ZEW index continues to fall, adding to concern about the outlook for Europe's largest economy.

Meanwhile the dip in risk appetite has led to a slight unwinding in come carry trade positions - a risky strategy where investors borrow in low-yielding currencies to invest in high yielding ones elsewhere. This has caused the the yen to firm, while high-yielding currencies such as the Australian dollar have dipped.

'Equity market sentiment appears fragile as the US earnings

season gets into full swing and relatively high yielding and commodity linked currencies have underperformed over the last 24 hours,' said Steve Pearson, currency strategist at HBOS.

Elsewhere the pound was weaker ahead of the release of UK September inflation figures at 9.30 am BST. The key measure of inflation, the annual CPI rate, is expected to edge up slightly in September but still remain below the Bank of England's 2.0 pct target for the third month in a row.

Annual CPI is forecast to increase to 1.9 pct from 1.8 pct in August, as this year's drop in petrol prices fails to match the steep decline witnessed in the same month a year earlier.

A softer-than expected CPI reading is likely to weigh on the pound as it will raise expectations that the Bank of England could cut interest rates in the coming months.

'Inflation coming in weaker than expected, and below the target, would give the doves on the Monetary Policy Committee more scope to suggest cuts to help ease short-run worries about prospects for activity,' said currency strategists at Barclays Capital.

London 0814 GMT London 0500 GMT

US dollar

yen 116.89 down from 117.36

sfr 1.1827 up from 1.1805

Euro

usd 1.4164 down from 1.4204

yen 165.57 down from 166.69

sfr 1.6756 down from 1.6766

stg 0.6953 up from 0.6952

Sterling

usd 2.0371 down from 2.0422

yen 238.10 down from 239.69

sfr 2.4089 down from 2.4110

Australian dollar

usd 0.8904 down from 0.8984

stg 0.4372 down from 0.4397

yen 104.10 down from 105.43

rachel.armstrong@thomson.com

rar/lam

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