Dollar In Demand As Risk Aversion Grows

The U.S. dollar has traded sharply higher overnight, except against the Japanese yen, as subprime problems surged to the surface once more, leading to more risk aversion.

Although there have been headlines in the past weeks surrounding the potential exposure of European banks to the U.S. subprime housing market, the news that Canadian funds can no longer place asset-backed deals, and an Australian mortgage originator is being hit by a credit tightening suggests the subprime situation is having a broad impact. Equities continue to be hit, with most European indexes around 1% lower, and sovereign debt has caught a bid - the 10-year U.S. Treasury is now yielding 4.72% - as investors shun more risky plays, to the benefit of the dollar. At 0800 GMT, the euro stood at $1.3489, from $1.3533 in late New York trade, and having touched a low of $1.3475 earlier in the session, the lowest level since reaching $1.3431 on June 29. Cable also suffered, continuing a move seen Tuesday with the release of weak U.K. inflation figures. Sterling traded at $1.9907, having earlier pushed through $1.99 to reach $1.9866, just off the low of $1.9826 reached on June 19. With investors turning their backs on risky carry trades, the yen was the one major that made gains against the greenback. At 0805 GMT, the dollar stood at Y116.93, having touched Y116.61 earlier, its lowest level since reaching Y116.38 on March 28. Similarly, the euro stood at Y157.69, approaching the low of Y156.64 seen on March 30. Thus, "the subprime issue has morphed from being USD-negative to risk appetite-negative," said Standard Chartered. "Going forward, risk appetite may continue to decline near term and carry trades to be unwound. However, "at some stage, investors will bargain hunt again in global markets and the carry trade will resume, albeit perhaps with less fervor," said Standard Chartered. Looking ahead, the Bank of Japan's policy meeting on Aug. 22 is important and could be a trigger helping to stabilize markets if it keeps rates on hold, the bank added.