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Dollar at new low as markets hit by banking woes PDF Print E-mail
Wednesday, 16 July 2008

REUTERS, LONDON - Fears about the world banking system overwhelmed any lingering support from the US plan to rescue Fannie Mae and Freddie Mac on Tuesday, battering equities and sending the dollar to a record low against the euro.

The US currency fell to $1.6038 to the euro, its lowest ever level.
Economic surveys also painted a picture of gathering gloom with Germany's ZEW saying economic expectations were the lowest it had recorded and the Bank of France business confidence index at a five-year low.
Whatever sentiment boost investors managed to take from the US Federal Reserve and Treasury Department plan to lend money and buy equity in mortgage giants Freddie and Fannie Mae was soon dissipated in a sea of worry about other financial institutions.
"Sentiment is really fragile," said Louis Wong, research director with Phillip Securities in Hong Kong. "Investors are worried that there might be more bank failures, especially small banks in the United States."
MSCI's main world stock index was at a 21-month low and on track for an 11th consecutive daily loss. Its emerging market counterpart lost more than 2 percent while Asia stocks fell to a two-year low.
The pan-European FTSEurofirst 300 was down 1.2 percent and Japan's benchmark Nikkei average closed down just shy of 2 percent.
The euro climbed past its April's record of $1.6018 to new heights.
"Right now though it's still a how weak can the dollar go as opposed to the European story. Weak German growth probably pales in comparison to the serious problems with Fannie Mae and Freddie Mac," said UBS currency strategist Geoffrey Yu.
The dollar was weak across the board at a three-month low against a basket of major currencies.
The catalyst for the widespread gloom is a renewed fear that the credit crisis which began shaking the financial system a year ago may not be over, as many had hoped.
On top of the troubles at Fannie and Freddie, two pillars of the US mortgage system, regulators seized the US mortgage lender IndyMac Bancorp Inc late last week following withdrawals by panicked clients.
Many investors initially reacted positively on Monday after the Fed and Treasury indicated they would not let Fannie and Freddie fail, but markets soon began focusing on the reason that such commitments were needed in the first place.
"The conditions are foul and it is possible that the downwards spiral continues if a possible run on banks in the US intensifies," said Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt.
The worries have come on top of other fears for the future, including record high oil prices threatening inflation, slowing growth in the US and European economies, and rising geopolitical concerns revolving around the Middle East.
European credit spreads widened sharply, led by financials and tracking US credit spreads overnight.
"Yesterday the crisis was over and today the crisis is back," a trader in London said.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 15 basis points wider at 555 basis points.
Crude oil was up around 80 cents on the day at more than $146 a barrel.
Euro zone government bonds gained. Ten-year Bunds yielded 4.319 percent, up 6 basis points, while the two-year Schatz yield was up 4 basis points at 4.353 percent.

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