The dollar plunged across the board on Monday as the spreading US financial crisis led to JPMorgan Chase acquiring stricken investment bank Bear Stearns, stirring fears that more financial firms could become casualties.
The Federal Reserve took more emergency measures to stem the fast-spreading financial crisis, cutting its discount rate on Sunday and opening up discount window lending to major investment banks, a tool not used since the Great Depression.
As the dollar slid 3 per cent against the yen at one point to its lowest since 1995, investors became more convinced that the Fed and other major central banks may have to conduct coordinated dollar-buying intervention to stem the sell-off.
"The speed of the slide in the dollar/yen is so rapid that US action alone can no longer stop the dollar's downward trend," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investment. "The time is ripe for coordinated intervention by US, European and Japanese authorities."
The dollar later trimmed some losses after Japanese Finance Minister Fukushiro Nukaga stepped up his verbal warnings on Monday, saying he is watching currency market moves in cooperation with authorities in the United States and Europe.
Investors have dumped the dollar on doubts about the Fed's ability to contain the deepening credit market turmoil, which has hobbled its efforts to help the economy by slashing rates and raised the threat of a protracted US economic recession.
Traders said the dollar was suffering from an almost perfect storm of negative factors: a worsening financial crisis originating in the United States, unusually aggressive Fed rate cuts and investors diversifying away from the US currency.
"Market players are afraid that there will be a second and third Bear Stearns out there," said Kosuke Hanao, head of forex sales at HSBC in Tokyo.
The dollar hit a record low versus the Swiss franc and struck a 13-year low beneath 96 yen on deteriorating confidence in US assets from the crisis spawned by the defaults on US subprime mortgages.
"The market is totally panicking," said a trader at a big Japanese bank. "The fact that the Fed had to announce its emergency steps on Sunday night highlighted the seriousness of the situation."
The dollar slide as far as 95.77 yen on trading platform EBS, down more than 3 per cent on the day, before clawing back to 96.8 yen
At its lows, the dollar was on track to for its biggest one-day drop against the yen in a decade. In less than three months this year, the dollar has already shed more than 13 per cent against the Japanese currency.
The euro hit a fresh peak of $1.5905 on EBS but then retreated to $1.5850 up 0.8 per cent.
The dollar dropped as low as 0.9572 Swiss francs, an all-time low, then rebounded to 0.9715, down 2.7 per cent.
The concerns about the US financial system prompted investors to shift their funds to safe-haven gold, boosting spot gold to a record peak above $1,030 per ounce.
Short-term US Treasury yields fell to five-year lows as investors see a chance the Fed could slash overnight rates by up to 125 basis points by the end of its policy meeting on Tuesday.
A single cut of that size would mark one of the biggest in the modern history of the Fed.
The fears about the damage from the credit markets and plunging dollar hit shares, pushing down Tokyo's Nikkei stock average by nearly 4 per cent to its lowest since August 2005.
Many market participants are now hoping US authorities will eventually use public funds to help stabilise stumbling credit markets, believing that just slashing interest rates and injecting extra funds in the banking system cannot fix the problems.
As investors mulled the possibility of joint intervention, Nukaga and Chief Cabinet Secretary Nobutaka Machimura said on Monday that they were worried about excessive exchange rate moves -- a stepping up of their rhetoric.
But investors still doubted that Japan would act alone to limit the yen's gains. Earlier Nukaga had said that Japan was not preparing to act against the yen's surge.
"Solo intervention by Japan seems difficult. But given this market turmoil, the US and Europe could move and conduct coordinated intervention in the currency market," said a senior options trader at a Japanese bank in Tokyo. (Reuters)
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