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Troubled dollar enjoys a brief respite Peter Garnham The dollar pulled back from a record low against the euro Thursday as a brutal sell-off in equity markets fuelled by worries over the financial sector boosted the US currency. Adam Cole at RBC Capital Markets said the dollar was being driven higher as US investors liquidated assets in overseas markets in the face of increasing risk aversion. However, he said there was no guarantee that the dollar’s gains would last. “It’s a flight into liquidity rather than quality,” he said. “When you get such turbulence, funds liquidated in other asset markets find their way into the most liquid market – cash dollars. That does not mean they are going to stay there in the longer term.”
The dollar, which fell to a low of $1.4503 against the euro after the Federal Res-erve’s decision on Wednesday to cut interest rates by 25 basis points to 4.5 per cent, rose 0.4 per cent to $1.4420 by midday in New York. The dollar also rose 0.8 per cent against the Canadian dollar to C$0.9513, while the high-yielding Australian and New Zealand dollars tumbled 1.6 per cent to $0.9170 and 1.4 per cent to $0.7610 against the dollar respectively. The dollar also advanced 0.1 per cent to $2.0790 against the pound. This reversed an earlier move in which the pound rose to a fresh 26-year high of $2.0851 against the dollar after hawkish comments from Charles Bean, a member of the Bank of England’s mon-etary policy committee, further doused expectations for a near-term cut in UK interest rates. The pound rose 0.2 per cent to £0.6938 against the euro. Meanwhile, the yen rallied strongly as sliding equity markets encouraged investors to exit carry trade positions, in which the purchase of riskier, higher-yielding assets is funded by selling the low-yielding Japanese currency. The yen rose 0.5 per cent to Y114.73 against the dollar, climbed 0.9 per cent to Y165.50 against the euro, and gained 0.6 per cent to Y238.65 against the pound. The yen also surged 2.1 per cent to Y105.30 against the Australian dollar and 1.8 per cent to Y0.7610 against the New Zealand dollar. Elsewhere, the Saudi Arabian riyal fell to a three-week low of SR3.7430 against the dollar after the country’s central bank cut its reverse repo rate by 25 basis points following the Fed’s rates decision, damping speculation that it was about to abandon its peg against the dollar. Hans Redeker at BNP Paribas said the measure might reduce the inflow of foreign capital to Saudi Arabia but was unlikely to solve Saudi Arabia’s main problem – the diverging economic trend between its economy and that of the US. He said US economic problems were deep rooted and Saudi Arabia would have no choice but to de-peg from the dollar early next year.
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