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Forex outlook:
The dollar fell to a record low against the euro and a 26-year low against sterling on Tuesday as investors feared that the deteriorating U.S. subprime mortgage market could eventually slow the economy. The dollar's decline was steepest against the yen and Swiss franc, low-yielding currencies that benefited as investors cut back on their exposure to higher-yielding assets. The selloff was sparked by a report from the credit rating agency Standard & Poor's, which said it may downgrade $12.1 billion in subprime-related debt. Subprime loans are extended to borrowers with poor credit.
The euro rose as high as $1.3741 against the dollar, a record high, according to electronic trading. Sterling climbed to around $2.0275 against the dollar, the highest in 26 years. Against the yen, the dollar fell to a one-month low of around 121.90, down more than 1 percent for its biggest decline since mid-March. The dollar weakened 0.8 percent to 1.2062 Swiss francs.
The subprime news also pushed down U.S. stocks and Treasury yields. Implied volatility of major currencies along with stock option volatility ticked up, contributing to the pullback in risk-taking among investors.
The dollar was particularly vulnerable to the re-emergence of subprime concerns, which have nagged on investors all year, since expectations have increased the Federal Reserve will keep interest rates steady this year while other central banks raise rates. Widespread housing sector weakness has the potential to drag on economic growth and it could raise the likelihood for an interest rate cut by the Federal Reserve. Benchmark U.S. rates have held at 5.25 percent for more than a year, reducing the dollar's appeal to global investors when other major central banks such as the European Central Bank are raising rates. The ECB is expected to hike rates again in September to 4.25 percent, with some economists betting on a follow-up quarter-point hike to 4.5 percent by the end of the year. The Bank of Canada, meanwhile, raised interest rates to 4.50 percent earlier on Tuesday. The U.S. dollar rose 0.2 percent against the Canadian dollar to C$1.0514, benefiting from the Canadian central banks less hawkish monetary policy statement.
Gold: U.S. gold futures finished up just about $2 on Tuesday as trade sales early gave way to fund buying, despite the dollar slumping to set a record low against the euro. Traders said investor sentiment was upbeat and that the precious metal should move higher to test above the $670 an ounce area this week. Jonathan Jossen, an independent trader, said from the COMEX floor that trade houses were heavy sellers in early trading but buying by funds supported gold, and the market now looked firm and floor traders were bullish on prices. Profit-taking was seen early as gold traded as low as $660.30. On Monday, the benchmark gold contract jumped more than 1 percent on firm oil and base metals prices. Gold is usually seen as a hedge against inflation.
Crude Oil: U.S. crude oil futures ended higher on Tuesday, lifted by surging refined products amid new refinery troubles and trader talk of resurgent tensions between the U.S. and Iran. News that Iran is making its own centrifuges for its nuclear program and more U.S. naval forces entering the region also helped fuel the rally. "It's the Iran story -- that it is producing its centrifuges for refining uranium -- that has turned the market around on crude," said Nauman Barakat, senior vice president at Macquarie Futures USA. Traders also mentioned Iran-U.S. tensions amid news of the U.S. Navy sending a third aircraft carrier to its Fifth Fleet area of operations. That area includes waters close to Iran, whose dispute with the West over its nuclear plans has increased regional tensions. International Energy Agency Executive Director Claude Mandil on Tuesday reiterated recent IEA calls for the Organization of Petroleum Exporting Countries to increase its output, saying there was a risk that stocks of refined oil products might not suffice. "OPEC knows the situation. The market is not well stocked. It should quickly increase its production," Mandil said in an interview with French daily Le Monde. The IEA said in a report on Monday that global oil demand will rise faster than expected from now until 2012.
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