Dollar Falls vs Yen as US Stocks Weaken
NEW YORK (Reuters) - The dollar slipped against the yen on Monday, as U.S. stocks fell, with investors growing nervous about more hedge fund failures related to rising U.S. subprime mortgage defaults.
On Wall Street, U.S. stock indexes, which turned negative in late trading after posting gains earlier, were also weighed down by a recovery in oil futures, analysts said. U.S. crude oil futures traded on the New York Mercantile Exchange rebounded from early lows to close slightly above $69 per barrel.
"The fall in dollar/yen was pretty much due to the drop in stocks and there has been a very high correlation between the two," said Brian Dolan, chief currency strategist, at Forex.com in Bedminster, New Jersey.
"It's general jitters and people are hearing a fair amount of scuttlebutt around about other hedge fund failures waiting in the wings. People tend to buy the yen and sell the dollar when there's general uncertainty around," he added.
In times of increased risk aversion, investors tend to sell high-yielding but risky assets funded by the low-yielding yen.
In late New York trading, the dollar slipped 0.2 percent against the yen to 123.59 yen, down from Friday's peak of 124.16 yen, which was the highest since December 2002.
The euro also fell in tandem, down 0.2 percent at 166.49 yen, having reached a record high of 166.94 yen the previous session according to electronic trading platform EBS.
The euro was flat against the dollar at $1.3469, while sterling traded almost unchanged at $1.9981, having popped above the $2 mark for the first time in almost two months.
The Swiss franc, another low-yielding currency with interest rates of 2.5 percent, also drew some bids, pushing the dollar 0.1 percent lower at 1.2274 francs. The euro likewise eased 0.1 percent to 1.6536 francs.
Analysts said a Merrill Lynch report on Monday suggesting Bear Stearns Cos. Inc. may have to bail out a second troubled hedge fund it manages that invested in risky subprime mortgages, fueled nervousness in the currency and stock markets.
The investment bank earlier said it had provided up to $3.2 billion in secured financing to a fund it manages that was down about 5 percent through the four months ended April 30.
Foreign exchange trading was generally quiet, with currencies moving in narrow ranges ahead of a two-day Federal Reserve policy meeting. Investors will look to this meeting for clues on where benchmark U.S. interest rates are headed.
Investors also face a lot of fresh U.S. economic data this week and will pay particular attention to durable goods orders figures for May on Wednesday as well as May core personal consumption expenditures data on Friday.
"Investors are marking time and consolidating ahead of the Fed," said Alex Beuzelin, a senior market analyst at Ruesch International in Washington.
The Fed is expected to leave its benchmark interest rate unchanged at 5.25 percent when it concludes a two-day monetary policy meeting on Thursday.
On Monday, however, short-term rate futures had priced in a 44 percent implied chance the Fed will cut rates in 2007, up from 32 percent on Friday and 2 percent a week ago. Perceived prospects for a rate cut by the end of September are now at 22 percent.
