Euro woes will continueas risk appetite dries up currencies

The risk appetite in the last week dried up as the market woes over the euro zone's fiscal situation started to grow. Investors moved back into safe haven assets boosting the dollar and yen as the cost of insuring Greece, Spain and Portugal's debt rose. Market sentiment had the euro and pound both break technical levels which pushed them down further giving a net result of a rising dollar. The fears over the debt in Europe overshadowed the nonfarm payrolls data that came out on Friday.

On Friday, the US unemployment rate surprisingly fell to a five-month low of 9.7 per cent in January and factory payrolls grew for the first time since 2007. That survey found employment rising, with the size of the labour force roughly flat.

Euro

The euro started the week supported by European Central Bank President Jean Claude Trichet's comments on Tuesday that a strong dollar is in the US interests and corresponds to the overall interest of the global economy and Europe.

Stronger than expected January euro zone purchasing manufacturing index rose to 52.4 from 51.6 in December pushed the euro higher, but it remained on shaky ground as investors fretted about whether euro zone monetary authorities will bail out Greece.

Range for previous week: $1.3583-$1.4026. (Dh4.9890-Dh5.1517). Range for this week: $1.3200-$1.3789 (Dh4.8484-Dh5.0646).

Sterling

The British pound tumbled to end the past week against the dollar and yen led by broad based risk aversion sparked by the budget issues in Europe. Soaring yields sparked broader selling and traders looking for safety in the dollar and yen. The sterling-dollar and sterling-yen saw breaks below major support levels. Friday saw sterling losses outpace other bearish trending currencies.

The upcoming BoE quarterly inflation report will go a long way toward determining yield outlook and is the major event risk for the week.

Range for previous week: $1.5557-$1.6069 (Dh5.7141- Dh5.9021). Range for this week: $1.5828-$1.6096 (Dh5.8136-Dh5.9121).

Yen

Carry trades, which are funded with capital borrowed cheaply in yen, followed the spectrum of risky assets lower over recent weeks. Indeed, a Deutsche Bank index tracking G10 FX carry trade returns has had a near-term correlation reading of well over 0.90 with the MSCI World Stock Index.

As traders moved capital out of carry trades along with bets on other risky assets, they bought back yen to repay the borrowed capital used to establish the positions, sending the Japanese unit broadly higher. This dynamic may be thrown into reverse if risk appetite is to correct higher on an EU bailout, sending the yen lower in the near-term.

Range for previous week: 88.80 yen- 89.89 yen (Dh0.04086-Dh0.04013). Range for this week: 88.54 yen- 91.07 yen (Dh0.04033-Dh0.04148).

— HSBC Global Markets Middle East

Fourth week of declines

Asian currencies dropped for a fourth week, the longest run of losses since June, as concern that some European nations will struggle to contain and finance budget deficits eroded demand for emerging-market assets.

Malaysia's ringgit and the Singapore dollar led declines as the MSCI Asia-Pacific Index of regional shares slumped to a 10-week low. "It's a flight to quality with the sell-off in equities and risky assets," said Sim Moh Siong, a currency strategist at Bank of Singapore, a private banking unit of Oversea-Chinese Banking Corp., Singapore's third-largest bank by value. "It's broadening out to developed and emerging markets and the longer the problem lingers, the greater the risk of contagion."

The ringgit dropped 1 per cent last week to 3.4445 per dollar in Kuala Lumpur, and touched a four-month low of 3.4540 on Friday. The Singapore dollar lost 1.3 per cent to S$1.4233, South Korea's won slid 0.7 per cent to 1,169.45 and the Indian rupee declined 1 per cent to 46.6313. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-actively traded local currencies against the greenback, slid 0.6 per cent from January 29.

Emerging-market equity funds lost $1.6 billion (Dh5.88 billion) in the week ended on February 3, the biggest outflow in 24 weeks, according to Cambridge, Massachusetts-based research company EPFR Global.

The Korean won fell to a six-week low and Taiwan's dollar traded near its worst level in five weeks as stocks tumbled worldwide. Overseas investors sold $1.3 billion more Taiwan shares than they bought this week and yesterday trimmed their holdings in Korea.

"This is basically payback time for the rescue of the global economy last year, which was through government over-spending," said Dariusz Kowalczyk, chief investment strategist in Hong Kong at SJS Markets Ltd. "Because of exposure to exports and high foreign debt, the Korean won is vulnerable to what's happening with European sovereign credit."

Elsewhere in Asia, Indonesia's rupiah fell 0.8 per cent last week to 9,420 per dollar and Thailand's baht slid 0.1 per cent to 33.23. The Philippine peso slipped 0.1 per cent to 46.545 and China's yuan was little changed at 6.8271.