Dollar Wilts as
Subprime Issues Weigh

NEIL DENNIS / Financial Times (UK) 18jul2007

The dollar wilted against other leading currencies on Wednesday as financial markets were rocked again by fears over subprime mortgages.

Asian and European equity markets slumped, while the flight to safety lifted government bonds after Bear Stearns, the US investment bank, declared that its two subprime-focused hedge funds were ”virtually worthless”.

The dollar hit a new low of $1.3833 against the euro, and a new 26-year trough against the pound at $2.0548.

But few investors were interested in pushing the currency too low ahead of an important day for US data and central banker testimony. Consumer price inflation is due later in the session and is forecast to increase modestly after a rise in petrol prices. Meanwhile, Ben Bernanke, chairman of the Federal Reserve is expected to reiterate concerns over lingering inflation pressure.

By late morning in London, the euro was flat at $1.3783, while sterling stood 0.2 per cent higher at $2.0510.

The pound came off its earlier highs after the publication of the minutes from the last Bank of England monetary policy committee meeting.

Six of the nine members voted to lift interest rates to 5.75 per cent at this month’s meeting, but three members felt rates should go no higher until the tightening measures enacted so far have had time to feed through to the economy.

”This group could still change their mind given the recent inflation data,” said James Knightley at ING. ”CPI figures suggested core inflation pressures continue to build while energy and food prices remain under upward pressure.”

The pound rose 0.1 per cent against the euro to £0.6725.

Japan’s yen claimed ground as the fallout from the Bear Stearns announcement resulted in some unwinding of risk, namely the carry trade - where low-yielding yen are sold to fund purchases of higher-yielding assets.

The dollar fell 0.1 per cent to Y122.02, while the euro shed 0.1 per cent to Y168.23.

source: 18jul2007