allAfrica.com: Mauritius: As the bubble burst (Page 1 of 2)

The dollar rose as investors, weary of the US credit meltdown, ditched high yielding currencies and risky assets. Suddenly in the face of much market uncertainty, the greenback became a safe haven and accommodated funds from spooked investors.

While the greenback improved it ranking against a basket of major currencies, the euro succumbed to possible threats of European exposures to the US subprime mortgage sector. This sparked speculations that the European Central Bank might not tighten monetary policy in the euro zone as widely expected by the market. According to analysts, many European banks had the same kind of exposures in the credit markets as US banks. As the subprime crisis continued to intensify, the US stock indices got impacted and fell more than 2 percent. In addition, data showed that new housing dropped in July and that business condition in the mid-Atlantic region deteriorated in August. These data fuelled nervousness into a market already on the verge of panic with losses that kept piling up. The sharp risk aversion came after shares of Countrywide Financial, the largest US mortgage lender, plunged on Wednesday amid rumors it was having difficulties in raising funding. Countrywide shares fell over 30 percent on Thursday after stating that it had to draw all of an $ 11.5 billion credit line to fund operations after being turned down from accessing other credit markets. At that point, the focus was whether the signs of weakness in the US housing sector had any global implications.

Amid the chaos, the Federal Reserve slashed discount rate on loans to banks and stated that economic growth could slow down in light of tightening credit markets. Immediately, the dollar rallied against a basket of currencies after investors sought refuge in low-interest currencies and US treasuries. By cutting interest rate charged on direct Fed loans to banks by half a percent point to 5.75 percent, the FED was aiming at slowing a month-long slide on the Dow Jones industrial average and eased credit shortage fears in the equities market. The greenback did not stay up high, as the FED cut in discount rate fuelled speculation that the FED could eventually cut interest rates and hence, reduce the US dollar yield advantage.

Despite the FED move, market volatility remained high and many analysts believed that there would be rockier trading ahead. With the specter of recession lurking in the dark, more FED interventions might be needed to reverse US dollar strengths and reduce US home bias.

The US dollar traded at MUR 31.52 yesterday compared to MUR 31.368 last week.

The yen got pumped up as the fallout of the US subprime problems spilled over in other markets. Risk-averse investors unwound carry trades where yen was sold to fund the purchase of higher-yield currencies. According to analysts, high yielder would stay under selling pressures, pushing investors to cover short yen positions. During the week, yen had moved below 115 against the greenback and stayed there for most part of last week. Towards the end of the week, huge reversal of carry trades were noted sparked by heavy selling of risky assets such as stocks, corporate bonds and high-yielding currencies versus the yen. According to analysts, the yen short-term fate could very much depend on Japanese investors who initially had flocked onto foreign assets via mutual funds or trading currencies that gave better returns. On the other hand, yen gains had fuelled speculation that the Bank of Japan might step in to sell yen and buy dollars. However, another school of thought believed that such intervention would be highly improbable as that might undermine the efforts of both Japan and the USA to encourage China to let the yuan float freely.

The yen was sold at MUR 27.39 as compared to MUR 26.60 last week.

The same sad song could be sung for Sterling, which succumbed to the blows of risk aversion and the unwinding of carry trades. Investors felt the ripple effects of the US credit meltdown and reduced exposure to risky assets.

According to analysts, weaker underling fundamentals and financial market turbulences had forced people out of carry trades. In addition, the pound took some heavy losses when July consumer price numbers showed that inflation was below the Bank of England 2 percent target rate for the first time since 2006.

Minutes from the BoE's last rate-setting meeting showed that committee members were unanimous to keep interest rates at 5.75 percent and most had no firm view on whether interest rates would go up in the near future.

The Sterling was traded at MUR.62.64 as against MUR 63.12 last week

Major data/events this week

â-è Wednesday 22 Aug :

US Mortgage index

JP BoJ meeting

â-è Thursday 23 Aug :

US Jobless claims

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