24 NOVEMBER 2008
Global FX
The US dollar and the Japanese yen were in strong demand in the past two months as concerns about a deep global recession boosted safe haven flows. The US, euro zone, Japan and other economies are already in recession, and latest data from around the globe signal worsening conditions ahead.
Fear of a deep global recession sent risk averse investors running for cover, leading to a sell off in global stocks, commodities and high-yielding currencies. In contrast, safe haven assets, such as government bonds, were in strong demand. US Treasury yields plunged to historic lows. The yield on the 3-month Treasury bill was near zero and that on the 2-year note fell below 1% on November 20. Inflows into US Treasuries led to a marked strengthening of the US dollar.
Compared with its recent trough hit in July, the dollar has gained some 27% against the euro and 35% versus the British pound. The performance of the high yielding currencies was even worse. The Australian dollar and New Zealand dollar have lost about 55% and 45% of their respective value against the greenback. The Japanese yen was the only currency to have gained against the dollar, reflecting the massive unwinding of carry trades by risk averse investors.
With the world economy looking weaker by the day and financial stress is still evident, risk appetite is unlikely to rise significantly in the near term. This will continue to put downward pressure on riskier assets such as equities and high yielders, and bode well for safe haven assets such as US Treasuries, the dollar and the Japanese yen.
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