13.10.2008 11:51

FOREX: weekly review

Europe's currency is on course for its second straight weekly decline versus the dollar on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates further. The bank lowered its main refinancing rate two days ago for the first time in five years. The pound fell as much as 1.8 percent to $1.6792, breaching $1.70 for the first time since November 2003.

The yen headed for its biggest weekly gain in a decade against the dollar as the global stock- market rout prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan.
The yen gained 20 percent this week to 65.27 versus the Australian dollar, 15.1 percent to 59.17 against New Zealand's currency, known as the kiwi, and 7 percent against the euro on speculation investors will reverse trades in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia, 7.5 percent in New Zealand and 3.75 percent in Europe.

Japan's currency was poised to rise the most versus the 15- nation euro in any week since its debut in 1999 as the worst week ever for the Standard &Poor's 500 Index discouraged carry trades. President George W. Bush said the U.S. is working with global partners to solve the financial crisis as Group of Seven finance ministers and central bankers met in Washington.
The U.S. currency has dropped 5.2 percent against the yen this week, the most since Oct. 9, 1998, when it plunged 14 percent as investors shed risk and abandoned yen carry trades in the wake of the collapse of hedge fund Long-Term Capital Management LP.
Coordinated interest-rate reductions by central banks in the U.S., Europe and Asia in the past two days failed to revive lending among banks, putting stocks on course for their worst week in 30 years. The cost of borrowing in dollars in London for three months rose to 4.82 percent today, the highest since December, the British Bankers' Association said.
Threatened by the worst economic outlook in a quarter- century, G-7 officials arrived in Washington without a broad- based strategy that investors were seeking. Among options is a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion that U.S. Treasury Secretary HenryPaulson hasn't ruled out.
Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with counterparts from the G-7, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan. Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan, including having the government acquire preferred stock, two officials informed of the matter said.
The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent, while the European Central Bank and the central banks of the U.K., Canada, Sweden and Switzerland also reduced rates. Separately, China's central bank lowered its key one-year lending rate.
The Bank of Japan held its target lending rate at 0.5 percent yesterday, compared with 7.5 percent in New Zealand and 5.75 percent in Norway. The Reserve Bank of Australia cut its cash rate by 1 percentage point to 6 percent.