Published October 23, 2008

US$ hits S$1.50, pound gets pounded

As recession fears grow, US$ and yen grow in strength

By LARRY WEE

	Email this article
	Print article
	Feedback

(SINGAPORE) Recession fears rattled currency markets anew yesterday, sending the US dollar and Japanese yen to multi-year highs but punishing some other currencies quite viciously.

Locally, the greenback jumped by an unusually large 1.2 per cent to finish at a fresh 13-month high of almost S$1.4977 yesterday, while also scaling new heights versus other Asian currencies like the Malaysian ringgit, Indian rupee, New Taiwan dollar and the Philippine peso.

US investors tend to pull out of risky markets in times of crisis and send their money home - so the greenback invariably thrives when recession looms. The yen also gains when the huge pool of Japanese savers seek home comforts in the face of uncertainty elsewhere.

Yesterday, the worst losses were reserved for the British pound, which plunged through key round number supports such as US$1.70 and US$1.65 after the Bank of England's governor Mervyn King warned late in US trading hours that Britain was headed for a long and painful slowdown.

This triggered a fresh round of selling on both the stock and currency fronts.

While the Singapore dollar recorded a fresh 2008 low of S$1.4995 per US dollar yesterday, the local unit was also able to chalk up fresh 2008 highs versus even faster-falling currencies like the pound and euro yesterday - which ended the day at S$2.4546 and S$1.9338 respectively.

In Asian trading, the pound fell as much as 5 per cent from Tuesday's Asian close to hit a fresh five-year low of US$1.62, before recovering to close the day at US$1.64. In the process, the UK currency also nosedived to eight-year lows of S$2.4290 and 160.90 yen - the latter a slide of 28 per cent since the end of 2007.

Traders suggested that the currency market's renewed mood of fear and risk aversion was no doubt exacerbated by overnight news of lower commodity prices and more stock market losses - the latter led by a 4 per cent slump in the tech-heavy Nasdaq Composite Index. Indeed, by the Asian close yesterday, some Asian bourses had recorded even sharper losses.

Here, the Straits Times Index ended 99.66 points or 5.2 per cent down at 1,821.13, its lowest closing level in more than four years. Elsewhere in Asia, Japan's Nikkei-225 index fell 6.8 per cent, while Hong Kong's Hang Seng Index and Korea's Kospi stock benchmark both ended 5.1 per cent lower.

Amid all this, the yen gained strength. Even the greenback eventually finished Asian trading at a two-week low of 99.13 yen. In Singapore dollar terms, the Japanese unit jumped 3.3 per cent to finish at a fresh three-year high of S$1.5105 per 100 yen.

The euro, meanwhile, was forced well below US$1.30, and at one point found itself the best part of 10 yen weaker than its Tuesday highs - at its worst yen lows in more than four years - before regaining some composure by the Asian close.

Standard Chartered Bank researchers, who had already warned early in October that the greenback could enjoy an extended run-up all the way to mid-2009, explained that the US currency tends to do well at times of global recession - just as in the 1970s and 1980s - because US investors tend to withdraw from riskier overseas destinations en masse and send their money back to US shores.

For perspective, they estimated that assets under management by US-run funds could amount to almost double the combined total of that managed by the world's central banks and sovereign funds put together.

As for the yen, its even more impressive strength has been attributed to a massive savings pool equivalent to some US$7 trillion - which also tends to run for the cover of home in times of crisis.

'Eventually, the multi-decade trend of US dollar weakness will resume as global economic expectations stabilise and investors refocus on nominal interest rate spreads and use the US dollar as a funding currency. For now, however, US dollar bulls will continue to enjoy one of their rare victories,' they predicted yesterday.