Dollar skids as investors shun risk

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This was published 14 years ago

Dollar skids as investors shun risk

The Australian dollar slumped to an eight-week low on a strong yen on Friday after choppy markets and fears that Dubai may not repay its $US80 billion debt turned investors off riskier assets.

Against the US dollar, the Aussie fell as far as $US0.8989, from Thursday's close of $US0.9220. At the local close on Friday, it had recovered slightly to $US0.9017, but still hovered at a three-week low.

The Aussie fell as far as 76.56 yen, from 79.83 here on Thursday. By late Friday, it had recovered slightly to 77.59, but is still 7.3 per cent down from last week's high of 83.84. On the week, the Aussie shed 3.9 per cent against the yen, the most in three weeks.

The market turbulence even led investors to pare the chance of the Reserve Bank of Australia raising interest rates by 25 basis points to 3.75 per cent on December 1. The probability of a rate rise fell to 43 per cent, from Thursday's 68 per cent. Yet a Reuters poll of 19 analysts found all but one expected the RBA to hike given the recent run of upbeat domestic data and the central bank's bullish longer-term outlook for the economy.

Traders said the Aussie's weakness was sparked by the yen's sudden take-off on Thursday when it zoomed past key technical levels.

That set off automated stop-losses which unnerved human dealers, fuelling more selling. Add to that uncertainty around the identity of banks and companies that have businesses in troubled Dubai, and traders said they had little appetite for putting their money in risky trades for now.

"The world is pretty risk averse right now," said Philip Burke, a trader at JPMorgan.

Burke said the Aussie's drop was driven by investors selling it to lock in profits, rather than shorting it on expectations it will fall further. He said hedge funds and mutual funds were the key sellers.

Some analysts agreed. Barclays said on Friday it is selling the Aussie so it can lie low amid market gyrations. That said, it wants to buy the currency again when markets have calmed down.

"The recent set of concerns on smaller emerging and middle eastern markets makes us beat a strategic retreat till risk conditions are restored," Barclays said.

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Asian equities fell across the board on Friday as investors shunned risk and sought safe-haven bonds.

However, a fixed income trader said investors only focused on bond futures on Friday and paid little heed to the cash bonds. He said that suggested that most bond investors active on Friday were short-term, speculative types.

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December bill futures jumped 0.10 points to 96.03, the highest in over seven weeks. Three-year bond futures leapt 0.13 points to 95.33, the highest in over two months, and the ten-year contract added 0.11 points to 94.815.


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