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Lower US forecast again prompts flight to safety

FRIGHT turned to flight once again in financial markets yesterday, when overnight news of a lowered Fed US growth forecast for 2008 spawned yet more painful losses for Asian equities, punished favourite high-yield carry trades, but lifted the euro and Swiss franc to record highs again.

Overnight, it was revealed that the US central bank’s key Federal Open Market Committee or FOMC had lowered its growth forecast for 2008 to a 1.8 to 2.5 per cent target range, compared with an earlier forecast of 2.5 to 2.75 per cent. And by the time Asian stock markets had closed, stock indices like the Straits Times Index and Nikkei had chalked up more painful losses of at least 2.5 per cent each, South Korea’s Kospi was 3.5 per cent worse off, and Hong Kong’s Hang Seng had tumbled more than 4 per cent.

As for the flight to safer destinations, the euro responded by elbowing its way to a fresh post-launch peak of US$1.4856 yesterday, and a new 31-month high of S$2.1519. Against the Swiss franc, another saferefuge favourite, the US dollar plunged to an all-time low of 1.1025 francs in Asian trading. The unit was also lifted to a fresh 18-month high of S$1.3141.

Indeed, the start of higher euro forecasts such as US$1.60 to US$1.70 was already being discussed before the end of Asian trading hours yesterday. An economic adviser to the German government was quoted as saying that the euro could well hit US$1.60, while UK-based research firm IDEAglobal warned in an FX alert that a US$1.6 to US$1.7 euro could not be ruled out if sub- prime mortgage debt problems in the US spread next year to other parts of the US bond market like corporate junk bonds and so-called ‘Alt-A’ debt offerings.

Gold, meanwhile, found its way back above US$800 per ounce with a handsome US$15 jump – as oil continued its almost inexorable climb to the US$100 per barrel mark yesterday. This time, however, such gains were not enough to lift either the Australian or Canadian dollar – due to another heavy sell-off for high-yield carry trade favourites, as risk aversion sentiment continued to mount.

In percentage terms, it was therefore the Japanese yen that finished with the most impressive gains, ahead of a US holiday today and an extended Japanese weekend break starting tomorrow. By the close, it had chalked up handsome gains of more than one per cent each versus the US and Singapore dollars, and recorded even larger gains against erstwhile carry-trade favourites like the trio of Australian, Canadian and New Zealand dollars.

The US dollar was eventually forced past our first key yen support at 108.8 yen to finish 1.5 per cent weaker at 108.62 yen, while the Australian, Canadian and New Zealand dollars ended over 2 per cent worse off each at 95.54 yen, 82.13 yen and 110.65 yen. Against the Chinese yuan, the greenback slipped a further 0.2 per cent to close just a whisker above its post-depeg low of 7.4103 yuan. Closer to home, the greenback rose between 0.5 and 0.7 per cent to close at 9,395 Indonesian rupiah, 928.9 South Korean won and 3.3810 Malaysian ringgit, and ended a more modest 0.2 per cent better at S$1.4498.


Source: Business Times 22 Nov 07


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