Dollar reaches new high amid US mortgage bailout

Dubai: The dollar soared to a one-year peak against the euro and a basket of currencies, having gained about 0.9 per cent against the euro last week.

Despite Friday's pullback and continued strains in the financial sector, sentiment towards the greenback remains positive, supported by growing views that the United States has escaped a recession and may potentially lead a global economic recovery in the second half of the year.

Euro

The dollar witnessed a roller-coaster ride throughout the week having rallied to a one-year high against a basket of currencies at the onset of the week.

The dollar breached new highs as investors cheered the government's takeover of the two biggest mortgage finance agencies Fannie Mae and Freddie Mac, in a bid to restore confidence in the US financial sector.

But while the news did much to alleviate concern about systemic financial market risks, it did little to change fundamentals that had started to drive the dollar higher prior to the weekend, slowing growth in the euro zone and the UK.

The dollar continued to track its upward momentum shrugging off uncertainty over investment bank Lehman Brothers on the view that problems in the US financial sector would also hurt the global economy.

Euro trended lower versus the dollar in a volatile session, with analysts attributing the bid to safehaven flows. Markets meanwhile, showed little reaction to the European Central Bank President Jean-Claude Trichet, who on Wednesday told the European Parliament it would be naïve to think markets will return to their pre-turbulence state.

The US unit climbed to a fresh one-year high against major currencies on Wednesday, as tumbling oil prices and a bounce in USstocks overcame worries about the health of financial forms.

The dollar is benefiting from the belief that the US economy may be more resilient than most economies at a time of heightened financial stress.

The euro slipped to a nearly 12-month trough of $1.3879 on the view that economic growth in the euro zone could slow more sharply than previously anticipated. Further pressuring the euro was a move by the European Commission on Wednesday to lower its 2008 euro zone growth forecast to 1.3 per cent from 1.7 per cent.

Range for previous week: $1.3879-$1.4428 (Dh5.0977- Dh5.2994) Range for this week: $1.4000-$1.4300 (Dh5.1422-Dh5.2523)

Yen

The low-yielding yen has been the best performing currency amongst developed currencies in the recent sessions, with much of its gains coming on the crosses, notably versus the high-yielders such as the Australian and the New Zealand dollars.

Against the dollar, the yen has gained ground, rising 1.1 per cent this week. Both the dollar and the yen remain on track for solid gains this week, fuelled by a general cutting of risk, unwinding of long-held leveraged positions and falling commodity prices. Concerns over the state of Asian stock markets in the longer term kept investors away from risk and carry trades. Fears of a further slowdown in the world economy, unstable financial markets and uncertainty over oil price moves will likely keep the Bank of Japan focused on near-term downside risks when its policy board will hold a two-day meeting from Tuesday and is likely to announce its decision on Wednesday.

Range for previous week: 106.04 yen-109.08 yen (Dh0.033672-Dh0.034637) Range for this week: 105.50 yen-108.50 yen (Dh0.033852-Dh0.034815)

Sterling

Sterling remained under pressure against the dollar for most part of the week as weak results from troubled US bank Lehman Brothers caused investors to pare back their exposure to risk. Lehman revealed a larger-than-expected third quarter loss of $5.92 per share and slashed its annual dividend, highlighting its deep financial problems.

Forecasts from a leading UK think tank on Wednesday highlighted recession risk facing the UK. The National Institute of Economic and Social Research said the economy contracted by 0.2 per cent in the three months to August after 0.1 per cent fall in GDP in the three months to July.

Concerns over the economy have been exacerbated by fears that neither the Bank of England nor the UK government will be in a position to help prop up the sharply slowing economy via interest rate cuts or fiscal measures. Friday however saw sterling rise against the dollar as weak US economic data stalled a broad rally in the US currency, while investors trimmed bets on an imminent UK interest rate cut.

Range for previous week: $1.744-$1.7975 (Dh6.4075-Dh6.6022) Range for this week: $1.7700-$1.8000 (Dh6.5012 - Dh6.6114)