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Forex outlook:
The dollar advanced the most against the euro since January as subprime losses encouraged investors to avoid riskier assets and repatriate money. The U.S. currency increased more than 2 cents from a record low against the euro and rose from the weakest in 26 years versus the pound as investors sought refuge from a global rout of stocks and corporate bonds. The dollar's rally may sputter next week on a government report forecast by economists to show slowing job growth this month. The dollar benefited ``from liquidation of foreign equity positions by U.S. investors, a dynamic which has periodically boosted the dollar during times of equity market stress over the past several years,'' said Daniel Katzive, a senior currency strategist in Stamford, Connecticut, at UBS AG. ``We think this phenomenon has further to go.''
The U.S. currency rose 1.4 percent to $1.3636 per euro this week and 1.55 percent to $2.0242 per pound. It was the biggest weekly advance against the euro since January and the most versus the pound since September. The dollar rebounded after dropping on July 24 to $1.3852 per euro, a record low, and $2.0654 per pound, the weakest since May 1981. The dollar advanced against all 16 of the most actively traded currencies tracked by Bloomberg except the yen this week, rising 4 percent against the New Zealand dollar, 3.2 percent versus the Australian currency, 1.5 percent against the Canadian dollar and 0.6 percent versus the Swiss franc. ``The dollar is enjoying the safe-haven bid,'' said Stephen Malyon, co-head of currency strategies in Toronto at Scotia Capital Inc. ``We are seeing signs of spillovers from the housing slump.''
U.S. employers probably added 130,000 jobs in July, down from 132,000 a month earlier, according to the median forecast of economists surveyed. The jobless rate is forecast to stay at 4.5 percent. The payroll data is due from the Labor Department on Aug. 3. Federal Reserve policy makers have held the target rate for overnight lending between banks at 5.25 percent since an increase in June 2006. The benchmark compares with 4 percent in euro zone, 5.75 percent in the U.K. and 0.5 percent in Japan, the lowest among industrialized nations. Traders raised bets the Fed will cut rates to 5 percent by year-end. The yield on fed funds futures contracts due in December fell yesterday to 5.06 percent from 5.18 percent a week ago.
The yen advanced against the 16 most actively traded currencies this week as a global sell-off in stocks, credit bonds and emerging-market assets prompted investors to cut higher-yielding investments funded by loans in Japan, known as carry trades. U.S. stocks dropped, led by a 4.2 percent loss in the Dow Jones Industrial Average, the biggest weekly decline since March 2003. Treasuries rallied, with the benchmark 10-year notes posting the largest weekly gain since Septembenr as investors sought the safety of government debt.
The risk of owning U.S. and European corporate bonds advanced to record highs yesterday on concern banks and hedge funds face widening losses from subprime mortgages and leveraged buyouts. The yen rose this week 2.2 percent to 118.63 per dollar, 3.5 percent to 161.67 per euro and 3.7 percent to 240.11 per pound. The Japanese currency also rallied 6 percent against the New Zealand and 5.4 percent versus Australian dollars. ``This increase in risk aversion is forcing people to cut back on the carry trade, which has triggered the usual subsequent yen rally,'' said Robert Robis, an international fixed-income portfolio manager in New York at OppenheimerFunds Inc., which manages $250 billion.
The cost of options protecting against gains in the yen versus the dollar rose to a three-year high. The risk-reversal rate on one-month options reached negative 2.4 percent, the biggest premium for dollar puts since March 2004. A negative number indicates more demand for dollar puts relative to calls. Traders speculated this week that Prime Minister Shinzo Abe's failure to retain control of the upper house of parliament in tomorrow's election may jeopardize his plan to balance the budget. Abe said earlier this month that he hadn't ruled out raising the 5 percent national sales tax.
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