“Any signs of large reductions could see a run on the dollar,” he said.
Repatriation flows support dollar
By Peter Garnham
Published: September 30 2008 10:58 | Last updated: September 30 2008 10:58
The dollar advanced against the euro and the yen on Tuesday as US investors repatriated funds following the failure of the US government to push its $700bn financial rescue plan through Congress.
Adam Cole at RBC Capital Markets said weakness in global equity markets was not a reason to sell the dollar, despite the US being at the epicentre of the financial earthquake.
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“The main reason for this is the massive accumulation of overseas stocks on the part of US investors over the last four years which is now almost certainly being reversed as cash flows back into dollars,” he said.
These flows were particularly strong from emerging markets, traders said.
Further signs that the effects of the credit crisis were spilling over across the globe also supported the dollar.
This trend was emphasised by news of a €6.4bn capital injection into Dexia, the Franco-Belgian lender, by the governments of Belgium, Luxembourg and France.
“One aspect of support for the dollar has been the evidence that the financial market turmoil that has so far been mostly contained to the US is now spreading,” said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.
The dollar rose 0.4 per cent to $1.4363 against the euro, climbed 1.1 per cent to Y105.10 against the yen and gained 0.9 per cent to SFr1.0992 against the Swiss franc.
The dollar also stood flat at $1.8060 against the pound.
However, analysts said the longer-term direction of the dollar was cloudier.
Maurice Pomery at IDEAGlobal said the US administration looked to be in disarray, raising questions over investor confidence in the US as the world’s banker.
He said the onus was now on the US to get a fast resolution to the wrangling in Congress, otherwise some global central central banks might feel that it was finally time to diversify away from the dollar.
For this reason, Mr Pomery said, custodial holdings of US assets by foreign central bank’s needed very close examination over the next few weeks.
“Any signs of large reductions could see a run on the dollar,” he said.
Elsewhere, a tentative stabilisation in European stocks saw the low-yielding yen give back some of Monday’s sharp gains.
The yen eased 0.6 per cent to Y150.88 against the euro and lost 1 per cent to Y189.64 against the pound.
http://www.ft.com/cms/s/0/2cd6c0c0-8ed1-11dd-946c-0000779fd18c.html