U.S. dollar tumbles as investors flock to safer havens
By MARIAN STINSON, The Globe and Mail
Wednesday, September 12, 2001
The U.S. dollar tumbled and European currencies surged yesterday as investors scrambled for refuge after the World Trade Centre in New York was destroyed.
The greenback fell 1.9 per cent against the euro, the biggest decline since April 3. It also plunged 2.8 per cent against the Swiss franc, a traditional safe haven currency, the biggest drop in more than three years. It sank 1.5 per cent against the yen.
Trading in the U.S. foreign exchange market, where $1.1-trillion (U.S.) changes hands daily, ground to a halt early in the day after the attacks. When activity stopped, the dollar was trading at 91.47 cents against the euro. It fell to 1.64 Swiss francs and 119.21 yen.
“It's devastating. There's been nothing like this since Pearl Harbour,” said David Ebata, Canadian markets analyst with Thomson Capital Markets in Boston, before the firm closed for the day at noon.
The Canadian dollar sank to 63.59 cents (U.S.) mid-morning from 64 cents late Monday. The loonie quickly bounced back to 63.90 cents.
Although some Canadian firms remained open for most of the morning, trading in currency markets was thin and scattered as dealers watched events in New York and Washington unfold.
“It's foolish for anyone to do anything in this market,” Mr. Ebata said. “Things are totally, completely illiquid.”
As analysts closed up shop for the day it was difficult to know when North American markets would return to normal.
“No one will want to do anything until they see how the markets behave,” Mr. Ebata said. “There will be a lot of uncertainty and huge paper losses [in stocks].”
Although stocks will be under severe pressure, Mr. Ebata sees investors moving to the relative safety of U.S. bonds, particularly treasury issues, as happened after the stock market crashed in October, 1987.
Expectations have been building for an interest rate cut soon by the U.S. Federal Reserve Board since last Friday when the Labor Department reported that employment fell sharply in August and the unemployment rate climbed to a four-year high of 4.9 per cent. Some analysts expect a reduction before Oct. 2, the next regular policy meeting of the U.S. central bank.
“The U.S. has never faced anything like this before,” said Katherine Beattie, an analyst with Standard & Poor's MMS.
It's not clear if the Fed will act quickly and cut interest rates, she said.
Both the Fed and the Bank of Canada issued statements saying they will provide the liquidity needed to support the financial system.
Despite the battering the U.S. dollar took yesterday some analysts remain upbeat about its prospects.
“We still remain dollar-bulls,” though “very near-term the Swiss franc becomes the safe-haven currency of choice,” said Dustin Reid, a currency strategist at UBS Warburg in Stamford, Conn. Looking ahead, “the fundamental story hasn't changed” with the U.S. economy expected to outperform Europe's and Japan's.
The Swiss franc benefits because “people don't really trust the euro and are skeptical” about Japanese economic prospects, he said. The British pound doesn't get as much safe-haven buying as the Swiss franc because the pound tends to track the euro, he said.
The pound reached a seven-month high against the U.S. dollar climbing to $1.47, from $1.45 yesterday. Against the euro it was little changed at 61.79 pence per euro.
The Australian dollar rose 1.9 per cent to 52.34 cents from 51.35 cents yesterday. The New Zealand currency rebounded from a one-month low of 42.54 cents, rising 0.9 per cent to 43.47.
With files from Bloomberg News