Dollar gains on euro, pound
The dollar rallied against the euro and the pound Monday, as the Dow Jones Industrial Average fell below 6,800 for the first time in almost 12 years.
"The dollar is very strong across the board on the very weak global equity performance," said Sacha Tihanyi, currency strategist at Scotia Capital. "It is basically dollar demand through safe-haven flows and risk aversion" that is supporting the value of the greenback, he said.
Stocks sank Monday after American International Group (AIG, Fortune 500) posted the biggest quarterly loss in U.S. history, and the government said it would increase its bailout of the troubled insurer by $30 billion.
AIG said it recorded a $62 billion fourth-quarter loss, as the Treasury Department said its aid to the company now totals $162.5 billion.
"It is another event of instability that the government has had to go back and alter its bailout terms," said Tihanyi.
The 15-nation euro traded at $1.2579 Monday, down 0.4% from late Friday, when it cost $1.2633. The British pound cost $1.4051 Monday, down 1.7% from $1.4294.
British pound gets battered: The pound was hit especially hard Monday on continued financial sector weakness. "The performance of the pound is very much tied to the U.K.’s financial sector," said Tihanyi.
On Monday, European bank HSBC (HBC) said it is closing hundreds of U.S. branches that specialize in mortgage and consumer lending, and it plans to slash 6,100 jobs in the United States.
Also weighing on the pound, the Bank of England is scheduled to make its next monetary policy announcement on Thursday, March 5 auto loans for people with bad credit. The British central bank has its key lending rate set at 1%, and is largely expected to cut its rate Thursday.
Decreasing the key lending rate spurs economic activity, but it also works to devalue the currency because it makes more money available, driving the price down.
Tihanyi said the BOE was expected to cut its lending rate by 0.5%, but that the rate cut was already largely priced into the pound. "It seems quite unthinkable that we would see anything less than that given the economic environment and the communication coming from BOE policymakers."
While a rate cut is largely expected, investors will be listening for non-traditional monetary policy announcements, said Tihanyi.
Meanwhile, the dollar lost ground against the Japanese yen, buying ¥97.33 Monday, down 0.4% from ¥97.74 late Friday.
The Institute for Supply Management’s (ISM) manufacturing index for February rose to 35.8 from 35.6 in January, showing modest improvement for the second month in a row.
A solid read on U.S. manufacturing typically supports the dollar because it indicates a strong economy. However, the February ISM report is still below 50, which means the sector is contracting, and that would usually weigh on the greenback.
But this is not a usual situation, according to Tihanyi. "Equities are absolutely collapsing and they are overwhelming the normal response one would see to data releases like that."
Filed under: news by John