Greenback gains amidst world market turmoil

Dubai: The past week may be characterised as one of the most tumultuous in the history of financial markets and that has changed the face of the US banking sector.

The failure of Lehman Brothers, one of the top five investment banks, the sale of another one, Merrill Lynch, the rescue of insurer AIG by the US government - all happened in the week which also saw markets turn extremely risk averse and banks become shy of lending funds to each other.

Euro

The euro commenced the week at a 10-day high against the dollar as talks to rescue Lehman Brothers faltered and doubts resurfaced over the stability of the US financial system, also sparking talks of a possible rate cut by the Fed. The dollar gained after the 158-year old investment bank filed for bankruptcy after trying unsuccessfully to finance its risky assets, sparking some safe-haven flows.

Markets were also digesting news that Bank of America had agreed to buy Merrill Lynch in an all-stock deal worth $50 billion as the world's largest retail brokerage sought refuge from fears that it could be the next victim of the credit crunch.

On the interbank market, overnight dollar borrowing costs surged to well above the federal funds target rate, showing that banks were hoarding cash rather than lending it on. To ease liquidity fears, the Federal Reserve announced that it would accept stocks in exchange for cash loans for the first time in its 90-year history. Central banks worldwide moved to ease tensions and address deep distrust in short-term lending markets by pumping billions in temporary reserves.

Range for previous week: $1.4077-$1.4541 (Dh5.1705- Dh5.3409). Range for this week: $1.4050-$1.4550 (Dh5.1606-Dh5.3442)

Yen

The safe-haven yen commenced the week on the front foot, set for its biggest daily gain against the dollar since early 2002 by the prospect of Lehman's troubles. The yen continued to remain strong as a wave of risk-aversion swept the global markets. The Bank of Japan (BoJ) kept its interest rates unchanged unanimously in a widely-expected move and maintained its assessment on the economy, which it said was still sluggish. The yen, however, saw its worst one-day drop against the dollar in two months as the week closed and markets digested the news of plans of a comprehensive package being worked out by the US government to address the problem of toxic assets in the financial system.

Range for previous week: 103.51 yen to 108.06 yen (Dh0.033853-Dh0.035485). Range for this week: 103.50 yen to 108.50 yen (Dh0.033852-Dh0.035488)

Sterling

The British pound started weak against the greenback as the US currency gained against higher-yielding currencies on increasing risk-aversion in the markets after Lehman Brothers filed for bank-ruptcy protection. Data during the week continued to show deterioration in Britain's economic backdrop- the number of jobless jumped by 32,500 in August, its biggest rise since December 1992.

The minutes of the latest policy meeting of Bank of England (BoE) showed that eight of nine policymakers voted to leave interest rate on hold at five per cent with one policymaker calling for a 50 basis points cut while a hike was also discussed.

The pound rallied against the dollar as the week closed with risk-aversion easing on expectations of a comprehensive bailout plan by the US government. A Reuters poll last week forecast that the BoE would cut rates in the fourth quarter of this year and again in each of the following the quarters to leave rates at four per cent by the third quarter of 2009.

Range for previous week: $1.7730-$1.8386 (Dh6.5122 - Dh6.7532). Range for this week: $1.7800-$1.8500 (Dh6.5379-Dh6.7951)

- HSBC Global Markets Middle East