US dollar weakens on renewed credit fears

Jerry Hansin

22 April 2008

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US dollar weakens on renewed credit fears
Posted: 22 April 2008 0519 hrs

NEW YORK: The US dollar traded mainly lower on Monday as worse-than-expected earnings from Bank of America renewed concerns about the strength of US financial markets, traders said.

Market participants focused more heavily on financial market news amid a lack of US economic news.

The euro was changing hands at 1.5913 dollars around 2100 GMT, up strongly from 1.5814 late Friday. It had earlier traded close to its record high of 1.5948 dollars struck last Thursday.

The dollar meanwhile dipped to 103.19 yen compared with 103.66 late last week.

Traders said Bank of America’s results had caused some investors to reconsider whether the credit crunch roiling the financial markets was ebbing.

Bank of America said its profit plummeted 77 percent in the first quarter of the year to 1.21 billion dollars, highlighting the woes of the US banking sector from economic and credit turmoil.

Its profits shrunk dramatically from 5.26 billion dollars in the same quarter a year earlier when US financial markets were in much better shape.

“The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance,” Bank of America’s chairman and chief executive Kenneth Lewis said.

Lewis said that first quarter US growth is expected to be “minimal at best” amid a lingering housing market slump.

Such concerns have sparked a flurry of US interest rate cuts in recent months which in turn have contributed to weakening the dollar on foreign exchange markets as speculators have sought higher returns elsewhere overseas.

A hard line from eurozone officials about the danger of inflation has provided sustained support for the euro because it suggests the European Central Bank will not cut interest rates until much later this year.

Players widely expect further rate cuts later this month by the US Federal Reserve which could reduce the return on holding dollars further still. The ECB’s benchmark rate, 4.00 percent, is much higher than that of the Fed’s at 2.25 percent.

Market participants said the dollar will likely continue to suffer as a result until there are clear signs the US economy is beginning to pick up.

“We keep our view that the dollar will come under renewed pressure once a rising number of market participants lose their faith in the current optimistic view and against the backdrop of an economy that will remain sluggish for longer than many market participants currently envisage,” said Commerzbank analyst Gavin Friend.

Elsewhere, the British pound weakened after the Bank of England said it would allow major banks to swap mortgage-backed assets in exchange for government bonds in an effort to improve financial market conditions.

In late New York trade on Friday, the dollar stood at 1.0091 Swiss francs, down from 1.0180 late Friday.

The pound was at 1.9803 dollars, down from 1.9978. – AFP/de

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