21.07.2008 11:41

FOREX: weekly review

The dollar headed for a weekly advance against the euro, rebounding from a record low on signs U.S. investment banks will withstand credit-market losses stemming from the collapse of the subprime-mortgage market.
The U.S. currency rose versus the yen today after Citigroup Inc., the biggest U.S. bank, reported better-than-expected second-quarter results.
``The risk of a systematic meltdown has been reduced,'' said Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, the world's second-largest foreign- exchange trading firm. ``It lends some support to the dollar.''
The dollar traded at $1.5834 per euro in New York Friday, compared with $1.5863 Thursday and $1.5938 at the end of last week. It dropped to an all-time low of $1.6038 on July 15. The currency climbed to 106.88 yen from 106.28 yen Thursday. The Japanese currency traded at 169.23 per euro, from 168.58 and 169.46 on July 11.

The pound dropped to 79.37 pence per euro, from 79.16 Thursday, and to $1.9955 from $2.0038 on speculation the U.K. government will boost borrowing as Chancellor of the Exchequer Alistair Darling introduces new spending guidelines.
The rules will allow it to break limits on public sector debt, the Financial Times said today, without citing anyone. A Treasury spokesman said the report is ``pure speculation.''

The yen was set for a weekly loss against the US dollar, Australian dollar and South African rand as the rally in U.S. stocks following JPMorgan's earnings yesterday encouraged so-called carry trades. The yen fell 2 percent this week against the rand and 0.6 percent versus the Australian dollar.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan held its target lending rate at 0.5 percent this week, the lowest among major economies. Benchmark rates are 12 percent in South Africa and 7.25 percent in Australia.
``Currency traders are likely to take their cue from the stock market,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Earnings season isn't as bad as many had feared. There will be some pressure on the yen to weaken.''
The yen may decline to 107 per dollar Friday, Ishikawa forecast.
The S&P index lost 3.8 percent in the seven trading days ended July 15, the day the dollar reached its worst level against the euro, on speculation a government plan to shore up Fannie Mae and Freddie Mac would fail to restore confidence in the two largest buyers of U.S. home loans. It has since risen 3.6 percent.
``The Treasury and the Fed have put a firewall around Freddie and Fannie to contain the systemic risk in the financial markets,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It has created the conditions of a big dollar bounce.''
Merrill Lynch & Co., the third-biggest U.S. securities firm, reported a fourth straight quarterly loss yesterday.
Global banks and securities firms have reported losses and writedowns of $436 billion related to subprime loans to U.S. homeowners with poor credit, weighing on both stocks and the nation's currency this year.
Cheaper oil is still helping to support the greenback against the euro. Crude oil for August delivery is set for a record weekly drop in dollar terms, having lost about $14 a barrel since July 11 in New York.
The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.