Dollar gets boost against euro
The dollar rose against the euro and the pound but fell against the yen and Swiss franc on Friday amid news Washington supports an economic stimulus package to avert recession.
In late New York trading, the euro fell to $1.4622 (Dh.5.34) from $1.4673 (Dh5.36) on Thursday. The British pound, meanwhile, slipped to $1.9681 (Dh7.18) from $1.9713 (Dh7.20), dragged down by disappointing retail sales data in the United Kingdom.
The dollar's rise against both, however, is not a sign of traders' faith in the US currency, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
"I wouldn't be betting on the dollar putting in a bottom and strengthening in the midst of an elevated risk of a US recession," Gilmore said. "The stock market is melting down."
The Dow Jones industrial average has fallen more than 400 points in the past two days, even as politicians and government officials announced the economic stimulus plan.
The dollar fell to ¥106.67 (Japanese yen) from ¥107.00 yen and CHF1.0990 (Swiss francs) from CHF1.1003.
The Swiss franc and the yen, both "carry-trade" currencies, have tended to rise when stocks fall and decline when stocks jump.
Carry trades involve borrowing currencies from countries with low interest rates, such as Japan and Switzerland, and investing the funds in higher-yielding assets elsewhere. Carry-trade beneficiaries are usually the euro and currencies of countries with high interest rates, such as the New Zealand kiwi.
The dollar sometimes receives a boost on days when Wall Street tumbles, as nervous investors sell off the euro.
"It's a hard market to trade. Banks are losing gobs of money, people are losing faith in the financial system. What currency do you buy?" Gilmore said.
The major focus in currency markets continues to rest on interest rates. Lower interest rates can jump-start a country's economy but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.
The US economic woes have prompted Wall Street to clamor for additional Federal Reserve interest rate cuts, even after the US central bank has cut rates three times in recent months to 4.25 per cent, and signaled more may come.
In contrast, the European Central Bank has kept open the option of raising its rates – currently at 4 per cent – to curb the threat of rising inflation.
President George W Bush called on Friday for an economic stimulus plan including tax incentives for businesses and tax rebates for individuals adding up to about 1 percent of the country's gross domestic product. Treasury Secretary Henry Paulson said that amount would equal roughly $150 billion.
Congress, meanwhile, was at work on a bipartisan effort to produce a broader stimulus package.
In other New York trading, the dollar fell to CAD1.0282 (Canadian dollars) from CAD1.0299. (AP)
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