By Jamie McGee and Michael J. Moore
Dec. 31 (Bloomberg) -- The yen and the dollar were headed for annual gains versus the euro as the first simultaneous recessions in the U.S., Europe and Japan since World War II encouraged investors to take refuge in the currencies.
The dollar fell the most against the yen in more than two decades in 2008 on speculation the Federal Reserve’s zero interest rate will undermine demand for the greenback. The euro was poised for its biggest rally against the pound since the 15- nation currency’s 1999 debut, trading within 5 pence of parity, on speculation the recession in the U.K. will deepen.
“It was a year of deleveraging, a year of dollar demand caused by uncertainty, and a reversion to yen strength,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.
The dollar traded at 90.78 yen at 11:18 a.m. in New York, compared with 90.34 yesterday. It fell 19 percent this year, the most since 1987. The U.S. currency gained 1 percent to $1.3919 per euro from $1.4057, extending its advance this year to 4.8 percent. The euro dropped 0.4 percent to 126.46 yen from 126.97, extending its annual decline to 22 percent.
The dollar may strengthen to $1.25 per euro and 90 yen at the end of the first quarter, according to the median estimates of analysts in a Bloomberg News survey.
The euro declined 2 percent to 95.59 British pence from 97.57 yesterday, when it reached a record high of 98.03 pence. Europe’s currency has gained 30 percent versus sterling this year, the biggest gain since the euro’s inception.
Yen’s Gain
The yen was the best performer of 2008 among the world’s 16 most-active currencies against the dollar, while the pound was the worst, sliding 27 percent.
The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the euro, the yen the pound, the Swiss franc, the Swedish krona and the Canadian dollar, fell this month after the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy.
The U.S. government this year enacted a $700 billion Troubled Asset Relief Program and used half of those funds to help banks. The Treasury this week committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
The Standard & Poor’s 500 Index plunged 39 percent in 2008 as the economy deteriorated. U.S. Treasuries returned 14.9 percent, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The Dollar Index is set for a 5.1 percent advance.
U.S. ‘Hardest Hit’
“The U.S. is being hit hardest by this crisis, and the economy remains weak,” said Stuart Bennett, a senior strategist in London at Calyon, the investment banking unit of French bank Credit Agricole SA. “While the dollar has been benefiting from a safe-haven status, sentiment is now turning against it.”
The euro surged against the pound in 2008 after the Bank of England reduced its benchmark interest rate by 3.5 percentage points this year to 2 percent to limit the fallout from the global financial crisis.
The ECB cut its target to 2.5 percent, 1.5 percentage points lower than at the start of 2008, with some policy makers indicating they may be reluctant to lower borrowing costs again next month.
“The risk of deflation, along with continued deterioration in economic fundamentals, will prompt the ECB to re-evaluate its stance of possibly keeping rates on hold in January and prompt them to take action and cut rates,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Interest-rate differentials will swing back in favor of the dollar.”
Aussie Declines
The Australian and New Zealand dollars completed the biggest annual declines against the dollar since they started trading freely in 1983 and 1985, respectively.
The currencies in 2008 reached their highest levels against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. Oil prices fell today, contributing to the steepest annual drop in raw-materials costs in more than half a century.
Australia’s dollar was at 69.24 U.S. cents and has slid 21 percent this year. New Zealand’s dollar traded at 57.99 cents and has tumbled 24 percent in 2008.
The Australian and New Zealand dollars have slid 36 percent and 39 percent, respectively, against the yen this year as a global economic slump and $1 trillion in credit-market losses prompted investors to cut so-called carry trades.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
Australia’s benchmark rate is 4.25 percent and New Zealand’s rate is 5 percent, compared with 0.1 percent in Japan.
To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
Last Updated: December 31, 2008 11:26 EST
The dollar fell the most against the yen in more than two decades in 2008 on speculation the Federal Reserve’s zero interest rate will undermine demand for the greenback. The euro was poised for its biggest rally against the pound since the 15- nation currency’s 1999 debut, trading within 5 pence of parity, on speculation the recession in the U.K. will deepen.
“It was a year of deleveraging, a year of dollar demand caused by uncertainty, and a reversion to yen strength,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.
The dollar traded at 90.78 yen at 11:18 a.m. in New York, compared with 90.34 yesterday. It fell 19 percent this year, the most since 1987. The U.S. currency gained 1 percent to $1.3919 per euro from $1.4057, extending its advance this year to 4.8 percent. The euro dropped 0.4 percent to 126.46 yen from 126.97, extending its annual decline to 22 percent.
The dollar may strengthen to $1.25 per euro and 90 yen at the end of the first quarter, according to the median estimates of analysts in a Bloomberg News survey.
The euro declined 2 percent to 95.59 British pence from 97.57 yesterday, when it reached a record high of 98.03 pence. Europe’s currency has gained 30 percent versus sterling this year, the biggest gain since the euro’s inception.
Yen’s Gain
The yen was the best performer of 2008 among the world’s 16 most-active currencies against the dollar, while the pound was the worst, sliding 27 percent.
The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the euro, the yen the pound, the Swiss franc, the Swedish krona and the Canadian dollar, fell this month after the Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy.
The U.S. government this year enacted a $700 billion Troubled Asset Relief Program and used half of those funds to help banks. The Treasury this week committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.
The Standard & Poor’s 500 Index plunged 39 percent in 2008 as the economy deteriorated. U.S. Treasuries returned 14.9 percent, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The Dollar Index is set for a 5.1 percent advance.
U.S. ‘Hardest Hit’
“The U.S. is being hit hardest by this crisis, and the economy remains weak,” said Stuart Bennett, a senior strategist in London at Calyon, the investment banking unit of French bank Credit Agricole SA. “While the dollar has been benefiting from a safe-haven status, sentiment is now turning against it.”
The euro surged against the pound in 2008 after the Bank of England reduced its benchmark interest rate by 3.5 percentage points this year to 2 percent to limit the fallout from the global financial crisis.
The ECB cut its target to 2.5 percent, 1.5 percentage points lower than at the start of 2008, with some policy makers indicating they may be reluctant to lower borrowing costs again next month.
“The risk of deflation, along with continued deterioration in economic fundamentals, will prompt the ECB to re-evaluate its stance of possibly keeping rates on hold in January and prompt them to take action and cut rates,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Interest-rate differentials will swing back in favor of the dollar.”
Aussie Declines
The Australian and New Zealand dollars completed the biggest annual declines against the dollar since they started trading freely in 1983 and 1985, respectively.
The currencies in 2008 reached their highest levels against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. Oil prices fell today, contributing to the steepest annual drop in raw-materials costs in more than half a century.
Australia’s dollar was at 69.24 U.S. cents and has slid 21 percent this year. New Zealand’s dollar traded at 57.99 cents and has tumbled 24 percent in 2008.
The Australian and New Zealand dollars have slid 36 percent and 39 percent, respectively, against the yen this year as a global economic slump and $1 trillion in credit-market losses prompted investors to cut so-called carry trades.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
Australia’s benchmark rate is 4.25 percent and New Zealand’s rate is 5 percent, compared with 0.1 percent in Japan.
To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
Last Updated: December 31, 2008 11:26 EST
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