Reuters: US Dollar Report: FOREX-Dollar on offensive after growth worries hit riskier assets

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FOREX-Dollar on offensive after growth worries hit riskier assets Jun 22nd 2012, 06:13 Fri Jun 22, 2012 2:13am EDT * Dollar index holds near 1 week high * USD/JPY at 5-wk high, traders cite Japan's fiscal woes * Euro, commodity currencies steady after big declines * Growth worries, banks' ratings downgrade sap risk appetite * Merkel, Hollande, Monti, Rajoy meet at 1200 GMT By Antoni Slodkowski TOYKO, June 22 (Reuters) - The dollar held near a one-week high against a basket of major currencies on Friday, supported by a long-anticipated ratings downgrade of the world's major banks by Moody's while traders await the meeting of European leaders later in the day. Overnight, the dollar staged its biggest rally in more than three months after key surveys of business activity from China to the euro zone and the United States darkened the outlook for the world economy. Traders favoured the greenback, having sold it before the Federal Reserve meeting earlier in the week as they hedged against a small possibility that the bank would take aggressive quantitative easing steps. Instead, it announced the continuation of its "Operation Twist" which sells short-term bonds and buys longer-term securities, prompting traders to buy back the dollar, which is widely viewed as a safe asset, as concerns over the global economy once again came to the fore. This brought the dollar index to 82.288, after rallying nearly 1 percent in the previous session. It stalled at 82.398, failing to decisively breach the 50 percent retracement of the fall from 83.542 to 81.186 sustained in June. "Investors sought shelter in safe haven assets after the Moody's downgrade, which reminded them that the euro zone problems have morphed into a very serious global crisis," said a senior spot trader at a major Japanese bank based in Tokyo. Against the yen, the greenback rose 0.3 percent, hitting a 5-week high above 80.44 yen, extending its hefty gains made the day before. The move was highly unusual, traders noted, as the yen normally tends to gain in times of heightened uncertainty, and suggests that investors are still fretting over Japan's economic problems and expect further easing from the Bank of Japan. "Short-term accounts and hedge funds sold off the yen as Japan's fiscal woes once again came into light, with the ruling party split over a vote on a sales tax hike," said the trader. Bickering in the ruling Democratic Party of Japan, which may lead to a snap election, will further undermine the unpopular Japanese Prime Minister Yoshihiko Noda's ability to tackle the country's massive debt, twice the size of its $5 trillion economy. Gains in the pair were also attributed to light short-covering and buying aimed at triggering stop losses looming around 80.56. Some dealers targeted 80.91 as the pair's immediate resistance, corresponding to the 50 percent retracement of the decline from this year's high at 84.187 to the low of 77.652. Market participants speculated that if the tax bill is passed, there would be even more pressure on the central bank to loosen its policy further to offset the impact of the tax on the world's third-largest economy. SHIFTING AWAY The shift away from riskier assets came after China's factory sector shrank for an eighth straight month, business activity in the euro area contracted for a fifth month and U.S. manufacturing grew at its slowest pace in 11 months. As a result, the euro stood at $1.2559, having pulled away from this week's peak of $1.2748 set on Monday. It came close to testing major support at $1.2520, a low carved out in early Asian trade on Monday in reaction to initial Greek exit poll results. Traders said a break of $1.2520 would signal that a top at around $1.2748 has formed, opening the way for a downside test to as far as $1.2290, the low for this month set on June 1. Commodity currencies were hit hard as well, with the Australian dollar licking wounds after suffering its biggest one-day percentage fall in six months. The Aussie bought $1.0054, having dropped more than 1.3 percent from Thursday's high of $1.0205. Good support is seen at $0.9979, the 38.2 percent retracement of its June 1-20 rally. Keeping investors on edge, Moody's late in New York on Thursday cut the credit ratings of 15 global banks including JPMorgan and Morgan Stanley. If there was any solace to be found, it was that Morgan Stanley's rating was cut by two notches to Baa1, instead of a bigger three-notch downgrade that Moody's had threatened in February, traders said. "The focus now turns to the EU FinMin meeting and mini EU Summit of the leaders of Germany, France, Italy and Spain today," analysts at BNP Paribas wrote in a note, adding this meeting should lay the groundwork for the EU leaders summit next week. Friday's meeting will search for ways to achieve fiscal and banking union in the euro zone and, more urgently, it may also be the occasion for Spain to formally request assistance of up to 100 billion euros for its struggling banks. BNP analysts said any positive noises from the meeting should reaffirm their expectations for the euro to rise against the greenback from here as the market remained vulnerable to a short squeeze in the euro and a U.S. dollar sell-off. Link this Share this Digg this Email Reprints

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