Dollar tumbles, shrugs off Fed's emergency steps
Sunday March 16, 11:27 pm ET
By Rika Otsuka
TOKYO (Reuters) - The dollar tumbled to a record low against the euro on Monday on investor fears that more financial institutions could become casualties in the widening U.S. financial crisis that led to JPMorgan Chase (NYSE:
JPM -
News) acquiring investment bank Bear Stearns (NYSE:
BSC -
News).
The market shrugged off news late Sunday that the U.S. Federal Reserve announced fresh emergency measures to stem a fast-spreading financial crisis,
using tools it has not used since the Great Depression.
The move came after Bear Stearns' cash reserves were drained by fleeing customers on Thursday. On Friday the investment bank secured emergency funding from the Fed, extended through JPMorgan.
JPMorgan said on Sunday it would buy Bear Stearns in an all-stock deal, and that the Fed would fund up to $30 billion of Bear Stearns' less liquid assets.
"Market players are afraid that there will be a second and third Bear Stearns out there," said Kosuke Hanao, head of forex sales at HSBC in Tokyo.
The dollar fell sharply, hitting record lows against the euro and Swiss franc and striking a 13-year low under 96 yen, on deteriorating confidence in U.S. assets due to tightening credit conditions and concerns that the world's biggest economy is already in a recession.
Investors have dumped the dollar in recent months on doubts about the Fed's ability to handle a spreading crisis in the U.S. mortgage bond market, which is causing credit market turmoil and offsetting its efforts to help the economy by slashing rates.
"The market is totally panicking," said a trader at a big Japanese bank. "The fact that the Fed had to announce its emergency steps on Sunday night highlighted the seriousness of the situation."
The dollar fell to 95.77 yen on electronic trading platform EBS, down more than 3 percent on the day, before rebounding to 96.20 yen. The U.S. currency was on track to posting its biggest drop of the year against the Japanese unit.
The euro hit a fresh peak of $1.5905 on EBS but then retreated to $1.5866, up 1.2 percent.
The dollar dropped as low as 0.9572 Swiss franc, an all-time low, then rebounded to 0.9715, down 2.7 percent.
Deepening concerns about the U.S. financial system prompted investors to shift their funds to safe-haven gold, boosting spot gold to a record peak over $1,030 per ounce.
Short-term U.S. Treasury yields fell to five-year lows as broadening credit market troubles spurred investors to seek the safety of government debt. (US/)
Risk aversion hit shares, pushing down Tokyo's Nikkei stock average (Osaka:
^N225 -
News) by 4 percent to its lowest since August 2005. (MKTS/GLOB)
PUBLIC FUNDS, INTERVENTION
Many market participants are now hoping U.S. authorities will eventually use public funds to help stabilize stumbling credit markets, believing that just slashing interest rates and injecting extra funds cannot fix the current problems.
Investors see a 20 percent chance of the U.S. central bank cutting the benchmark federal funds rate by 125 basis points to 1.75 percent at the Fed's policy meeting on Tuesday -- that would mark one of the most aggressive policy moves by the Fed in its modern history.
Some investors think coordinated intervention is needed to prevent the dollar from depreciating further.
"The speed of the slide in the dollar/yen is so rapid that U.S. action alone can no longer stop the dollar's downward trend," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investment. "The time is ripe for coordinated intervention by U.S., European and Japanese authorities."
Japanese Finance Minister Fukushiro Nukaga and Chief Cabinet Secretary Nobutaka Machimura said on Monday that they were worried about excessive forex moves.
Government sources said comments from Nukaga and Machimura that they are "worried" about "excessive" moves are a stepped-up warning about intervention.
(Additional reporting by Shinji Kitamura and Akiko Ishiwata; Editing by Chris Gallagher)
