The Australian and New Zealand dollars declined a third day yesterday against the US currency, and lost ground against a surging yen, as concerns credit-market losses are mounting prompted investors to sell higher-yielding assets.
That will reverse today after US financial markets rebounded on a new plan by the US Federal Reserve to inject hundreds of billions of dollars in new loan funds a month to try and stabilise the slumping economy and steady confidence in banks and other financial groups.
The Dow and other indices rose,, the US dollar rebounded and commodities finished mixed to lower, especially metals.
Our Market is signalling a strong near 200 point rise this morning when trading opens.
It will be a firmer start than the confusion and uneasiness yesterday which saw falls in currencies across the Asian region (even though sharemarkets were mostly better).
The Japanese yen was the only exception and it hit a eight year high against the weakening US dollar. It slid in the US after the Fed moved.
Both the Aussie and Kiwi dollars shed ground on concerns about the health of the US investment bank, Bear Stearns and more worries about the health of banks in the region, especially Australia.
Investors are heading for cash or safe Government securities. In the US on Monday night the yields on the weekly auction of three month US treasury bills fell to just 1.420% from 1.790% a week ago, while for 180 day bills it fell to 1.450% from 1.810% because of strong demand from nervous investors.
Bear Stearns the rumours were false, but that didn’t stop the switch out of high yielding investments, such as the Aussie and Kiwi currencies.
Australia’s dollar was the second-weakest among the 16 most- traded currencies as the nation’s money market rates rose to a 13-year high.
Concern the credit crisis is deepening drove borrowing costs between Australia’s lenders to the highest since April 1995. The 90 day bank bill swap rate, which banks use to determine yields on variable rate loans, rose to 8.11% yesterday, compared with 8.02% on Monday and 7.5% a month ago.
The Australian dollar slid to a low of 91.57 US cents compared with 92.59 US late Monday, its lowest level since late January. It has now fallen almost four and half cents from the 24-year high of 94.98 US cents reached on February 29 to 3.5%.
The Australian dollar fell to 92.83 yen, the lowest since January 25, before trading at 92.97 from 94.61.
The New Zealand dollar slipped to 78.81 US cents yesterday from 79.46 cents late Monday. The currency fell to 79.92 yen; the lowest since January 24, before rising back over 80.09 yen.
It was a similar story across the region as many investors got a dose of what could be called ‘sovereign fright’ as the currencies and investments of previously steady and attractive investment destinations wobbled on the selling and rush to safety.
The yen traded near an eight-year high against the US dollar, hit those six week highs against the Aussie and Kiwi currencies while the greenback was also weak against the euro.
Japan’s currency rose to 101.43 to the US dollar, matching the eight-year high reached on March 7, before easing to 101.71
The South Korean Won fell to 979.30 against the dollar from 965.30, forcing the central bank to tell the market it was ‘watching’ the situation (and so are a lot of other people around the region.
The Aussie recovered a touch in overnight trading to be around 92.60 USc after the markets rose on the news that the US federal Reserve would start injecting another $US200 billion a week in a special term facility for its big dealers, as well as making up to $US40 available to the European and Swiss National Banks for the same purpose.
This is on top of the $US100 billion new figure for the Term Auction Facility which has been going since last December and the $US100 billion promised in repos each month for the dealers.
Wall Street surged and the US dollar strengthened against the yen, and our currency edged up from the lows of yesterday.
US shares had their strongest rise in five years after the Fed’s plans were revealed.
Banks, led by the staggering Washington Mutual, Citigroup and Well Fargo, led the rebound which boosted the Dow 417 points.
Our market is looking for a near four per cent gain with the futures showing a 195 point opening.
Stocks in Europe rose after Asia shares gained, although Australia was off.
The Standard & Poor’s 500 rose 47.28 points, or 3.7%, to 1,320.65, trimming its fall for the year to 10%. The Dow surged 416.66, or 3.6%, to 12,156.81. The NASDAQ Composite Index increased 86.42, or 4%, to 2,255.76.
The S&P 500 rebounded from its lowest level since August 2006. US Treasuries fell, pushing two- and five-year note yields up the most since 2004, as investors dumped holdings of government debt and bought stocks. The dollar rose the most in six months against the yen and rebounded from a record low versus the euro.
But it is a sucker rally: there’s no way the Fed’s cash injections will do anything but steady a floundering ship.
The Fed is injecting loan funds, not capital. US banks do not have enough capital to finance an upturn in lending. The subprime mortgage mess and house price slide still has a way to go.
In reality its a sign of how desperate the fed is to stabilise the situation that it is now flinging the best part of $US75 billion to $US100 billion a week at the economy to try and hold the line.
In reality much of money injected into the markets will be re-lent back to the US Government to finance its huge and growing budget deficit, which will be boosted from May by the $US162 billion emergency stimulus package, which includes around $US130 billion in tax rebates for individuals.
