Fears of a potential default in Dubai sent shock waves through financial markets Thursday, weighing on European and Asian equities and pulling the U.S. Dollar off of recent lows as investors sought out safe havens. Analysts said Dubai’s woes were a blow to sentiment, serving as a reminder that potential trouble spots remain in the world economy.
USD – Dollar Rebounds From 14-year Low vs. Yen
The U.S. Dollar rebounded versus most major rivals Thursday, benefiting from safe-haven flows amid fears of a potential sovereign debt default by Dubai. Dubai’s shock move on Wednesday to restructure its biggest corporate debtor, Dubai World, and delay repayment on some of the company’s $59 billion in liabilities, dented risk appetite across asset markets on Thursday, to the U.S Dollar’s benefit.
On Thursday, the greenback headed for its worst month since December against the Japanese Yen, before a report next week that economists say will show U.S. business activity has declined, supporting the case for the Federal Reserve to keep borrowing costs near zero. The U.S. currency traded at $1.4945 per EUR from $1.5019 yesterday.
However the Dollar edged up from its lows against the Yen in early trading Friday as renewed risk aversion prompted investors to shed riskier assets, giving pause to broad Dollar selling. Market players also refrained from re-testing lows on the Dollar as trade thinned for the U.S. Thanksgiving holiday.
However the Dollar-bearish sentiment remained intact on views U.S. interest rates would stay low for some time and on pressure for the Dollar to weaken to correct the U.S.’ imbalances.
EUR – Euro Falls 1% below $1.5 as Stocks Stumble
The European currency declined sharply in holiday-thinned trade on Thursday as renewed risk aversion prompted investors to shed riskier assets. The EUR hovered near the day’s low of $1.4960 down 1.1% for the day. The currency also hit a near 2-month low against the Japanese Yen at 129.52 yen.
The EUR extended losses as ratings agency Standard & Poor’s put the credit ratings of four Dubai banks on negative outlook and stock market losses reached 3%. The negative outlook for the banks is due to their exposure to Dubai World, which is seeking a debt standstill. The Dubai World story has weighed heavily on stocks all day, prompting traders to cut back their dollar-funded positions.
The British Pound trimmed early losses but remained 1.4% lower versus the U.S dollar at $1.64. The Sterling also slid 0.4% vs. the EUR to 90.93 pence. Concerns about U.K. bank exposure to Dubai weighed on the Pound, analysts said. There are concerns with regard to the extent of the U.K. banking sector exposure in Dubai which is weighing on Sterling. The underlying picture for Sterling was already fundamentally weak and this news further adds to the bearish sentiment.
JPY – Yen Advances vs. the U.S Dollar on Risk Aversion
The Japanese Yen strengthened to a 14-year high against the U.S Dollar, rising past 85.00 to the greenback on speculation renewed risk aversion will enhance the allure of the Japanese currency as a refuge.
The Yen climbed as high as 85.83 per Dollar, the strongest since July 1995, before trading at 85.20 from 86.59 yesterday. The currency advanced to 128.87 per EUR from 130.03, after hitting 126.91, the highest since April 29.
Japan’s currency did pare some of its earlier gains after Japan’s Finance Minister told reporters in Tokyo he will contact authorities in the U.S. and Europe about currencies if necessary. Shizuka Kamei, Japan’s financial services minister, also urged an international response to halt the rise in the country’s currency. The market showed paid attention to the warning from the government today and bought back the USD. However the impact of verbal intervention may not last long unless the government takes actual action analysts said.
Oil – Crude Oil Slips to a Low Near $76
Crude oil traded below $76 Friday, poised for a weekly decline on concern that the pace of fuel demand recovery in the U.S., the biggest energy- consuming nation, may stall. Prices fell as the U.S dollar strengthened against the EUR after Dubai’s attempt to reschedule debt spurred investors to seek the safety of assets perceived as lower risk. A stronger Dollar reduces the investment appeal of commodities.
According to analysts there seems to be anxiety across the markets, commodities and equities, stemming from concerns over Dubai’s possible default on debt. The markets are weighing what the implications of Dubai’s debt will be on the global economic recovery, they said.
Crude has remained locked in a tight range for most of this month with gains capped by weak fundamentals and a generally weak U.S. dollar curbing losses. Over the past 28 trading days oil has been bounded between $74.50 a barrel and $78 a barrel, and could spend most of the remaining days of this year within a somewhat broader $75-$82-a-barrel range.
The EUR/USD went increasingly bearish yesterday, and currently stands at the 1.4920 level. The daily chart’s Slow Stochastic supports this currency cross to fall further today. However, the 4-hour chart’s Stochastic Slow signals that a bullish reversal will take place today. Entering the pair when the signs are clearer seems to be the wise choice today.
There is a fresh bullish cross forming on the 4-hour chart’s Slow Stochastic indicating a bullish correction might take place in the near future. The upward direction on the hourly chart’s Momentum Oscillator also supports this notion. Going long with tight stops might be the right strategy today.
The cross has been dropping significantly for the past week now, as it now stands at the 86.10 level. The RSI of the daily chart is already in the oversold territory, indicating that an upward correction is imminent. This view is also supported by the RSI of the 4-hour chart. Going long with tight stops may turn out to be the right choice today.
The daily chart is showing mixed signals with its RSI fluctuating in neutral territory. However, there is a fresh bearish cross forming on the 4- hour chart’s Slow Stochastic indicating a bearish correction might take place in the near future. When the downward breach occurs, going short with tight stops may be the correct strategy.
The Wild Card – Crude Oil
Oil prices are once again dropping, and a barrel of oil is currently traded at around $75.25. Now the RSI on the 4-hour chart are giving bullish signals, indicating that oil prices might go up. This might give forex traders a great opportunity to enter a very popular trend.
Forex Market Analysis provided by Forex Yard.
© 2006 by FxYard Ltd
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