Financial woes at Wall Street brokerage Bear Stearns yesterday sent tremors through the foreign exchange and bond markets, depressing the dollar, boosting bonds and pushing up safe haven commodities like gold.
The euro soared to a new all-time record at $1.5688 before easing to $1.5644, unchanged from late Thursday. The eurozone currency also gained ground against sterling.
The dollar sank to a fresh twelve-and-a-half-year low against the yen.
"The market is concerned about Bear Stearns saying that their liquidity position has deteriorated," said Steven Butler, director of foreign exchange trading at Scotia Capital, a Canadian investment group. "It means things are really getting worse for the US economy."
Bear Stearns said its cash position had deteriorated significantly over the past 24 hours, prompting the US government and the banking group JPMorgan Chase to bail out the stricken investment house. It was a desperate effort to save Bear after a week of denials that it was in trouble. JPMorgan Chase is providing secured financing to Bear for 28 days, supported by the Federal Reserve Bank of New York.
Spot gold raced higher to scale an historic peak above the key $1000 mark after the dollar slumped further and fell below parity with the Swiss franc for the first time. At one stage, gold was selling at $1007.10. It later slipped back to trade around $998 on the London bullion market. In times of turbulence, gold is often a refuge.
Investors, rattled by a steep fall in equities, especially banking stocks, jumped into bonds.
Oil slipped below $110 as investors took profits after prices hit a record $111 on Thursday, but the depressed dollar was seen limiting losses.
US crude for April delivery shed 47 cents to $109.86 a barrel in New York after it touched a record for the seventh time in a row in the previous session. Oil is up nearly 8% this month and about 14.5% this year.
London-traded Brent crude for April delivery, which expired yesterday, dropped 28 cents to $107.26.
The concerns over the financial health of Bear Stearns and the wider implications for the global credit market overshadowed earlier tame inflation data.
Meanwhile, exchange rates and currency movements were the themes of a speech by Bank of England Deputy Governor John Gieve. Speaking to a financial audience in London, he said the currencies of countries with big current account deficits will need to fall if global economic imbalances are to be unwound without too much pain.
Gieve, whose remit is financial stability, signalled little concern about the dollar's slide to a record low against the euro that has worried some policymakers in Europe and Japan.
His comments also suggest the Bank of England would be happy to see a gradual weakening in the pound since Britain runs a large current account deficit.
"If the slowdown is not to dominate, we need to see a shift in relative prices to relative demand - that is, a gradual real exchange rate depreciation of deficit countries against surplus ones," he said.
"There are signs that in the United States, at least, imbalances are beginning to adjust. The US current account deficit now looks past its peak and the marked fall in the dollar - about 25% in real trade-weighted terms - since its peak in early 2002 should help in the adjustment," he said.
Gieve noted, however, that the dollar has fallen less against currencies of countries with the largest current account surpluses, such as China, than against many other currencies.
"There is a risk, therefore, that the fall in the US current account deficit will not be matched by a fall of surpluses in high surplus countries but a rise in deficits in other deficit countries," he added. "The imbalances could be transferred, not reduced."
While Gieve was speaking in London, EU leaders meeting in Brussels said their economy can weather the economic storm and their stable currency can withstand what they call "undesirable volatility and disorderly movements of exchange rates".
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