THE DOLLAR tumbled against the world’s leading currencies yesterday as investors bet that evidence of a faltering US recovery would lead to further monetary easing by the Federal Reserve.
Currency traders said that the worsening outlook for the US economy raised the prospect of a return of the so-called dollar “carry trade”, in which investors take advantage of low US interest rates to invest in higher-yielding currencies.
The yen yesterday approached its highest in 15 years against the dollar, trading at Y85.66, while the euro rose to $1.3261, a three-month high.
“The carry trade could become very fashionable again,” said Martin Wiedmann, global head of foreign exchange sales at Credit Suisse.
A return of the carry trade would put further downward pressure on the dollar, which has fallen more than 2 per cent in just a week against an international basket of currencies including the yen, euro and sterling.
Yields on two-year US treasuries have dropped to a record low of 0.5222 per cent.
Traders said the markets were pricing in a move to ease monetary policy further at the Fed’s rate-setting meeting on Tuesday.
The falls in the dollar and treasury yields have contrasted with a strong rally in share prices, powered by robust corporate earnings.
“Bonds and currency investors have been reacting appropriately to the impending US economic slowdown and deflation scare.
“Equity markets are, as usual, asleep at the wheel,” said Albert Edwards, global strategist at Société Générale.
Ben Bernanke, Fed chairman, said on Monday that there remained a “considerable way to go” before the US economy made a full recovery.
Debate has intensified within the Fed’s open market committee about whether the central bank should reinvest the money from maturing mortgage bonds, using the cash to buy treasury bonds or new mortgage bonds.
The Fed put mortgage bonds on its balance sheet as an emergency measure to pump liquidity into the banking system at the height of the financial crisis.
Maintaining the size of the balance sheet, rather than allowing it to shrink, would signal concern about weakening economic growth.
Widely watched US labour market figures to be published on Friday are likely to play a big part in the Fed’s decision.
Analysts were of the opinion that the perception of a struggling US economy as others, particularly in Asia, recovered more strongly, was likely to stimulate a growing dollar carry trade.– (Copyright The Financial Times Limited 2010)
