The Falling Dollar

The dollar fell to a four-month low against the euro and weakened versus the yen on speculation the U.S. government’s creditworthiness is deteriorating, sapping demand for the U.S. currency.

The yen advanced to a nine-week high versus the dollar after Japan’s Finance Minister Kaoru Yosano said the government isn’t planning to intervene in the currency market. The dollar headed for its biggest weekly loss in two months versus the euro after Standard & Poor’s yesterday cut its outlook on the U.K.’s AAA credit rating to “negative” from “stable,” raising concern the same may happen to the U.S. South Korea’s won led Asian currencies higher as regional shares gained.

“Dollar sentiment is particularly bad,” said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “A lot of Treasuries are held by foreign investors and any concern about the value of U.S. debt will have a massive impact” on the U.S. currency.

The dollar declined to $1.3930 per euro as of 12:45 p.m. in Tokyo, after dropping to $1.3955, the lowest since Jan. 5. The U.S. currency has slumped 3.2 percent this week, heading for the biggest loss since the five days to March 20.

The yen rose to 94.12 per dollar, after reaching 93.87, the strongest since March 19. The yen traded at 131.18 per euro from 131.15. The won gained 0.6 percent to 1,240.90 per dollar.

The dollar weakened versus 14 of the 16 most-traded currencies after U.S. Treasury yields yesterday rose the most in two weeks on concern the government will not be able to fund its fiscal spending.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a note today. “The first considerations will likely be hard currencies that are liquid. On these counts, the likes of the euro, yen, Australian dollar and Canadian dollar will win out.”

The cost to protect buyers of U.S. sovereign bonds for five-years climbed to a two-week high, indicating deteriorating investor perception of the nation’s credit quality. U.S. credit- default swaps rose to 37.745 yesterday, the highest since May 4, from 34 on May 20, according to CMA DataVision. The five-year CDS price for Japan fell to 50 from 50.06 on May 20.

The dollar touched a four-month low of 1.0895 Swiss francs from 1.0936. The U.S. currency fell to C$1.1335 from C$1.1374 yesterday, after reaching $1.1328, the weakest since Oct. 14.

The U.S. currency also fell for a fifth day versus the euro after Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. will “eventually” lose its AAA rating.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating-cut, Newport Beach, California-based Gross said in an interview yesterday on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

The pound traded at $1.5859 from $1.5844 yesterday. It earlier climbed to $1.5897, the highest level since Nov. 6. The currency slumped as much as 1.5 percent yesterday after S&P lowered its outlook on U.K.’s credit rating and said the nation faces a one in three chance of a rating cut.

Investors also sold the dollar after the failure of BankUnited Financial Corp. added to concern the banking system in the world’s biggest economy remains weak.

BankUnited was in an “unsafe condition” and the quality of its loan portfolio had deteriorated, the Office of Thrift Supervision, the lender’s main regulator, said yesterday. BankUnited joined 33 U.S. banks and at least five credit unions that have gone under since January.

The administration of President Barack Obama will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. The U.S. Treasury reported the first budget deficit for April in 26 years, recording a $20.9 billion shortfall.

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 0.3 percent to 80.327 after dropping to 80.21, the lowest since Dec. 29.

The yen headed for a thirdly weekly gain versus the greenback after Japan’s Finance Minister Yosano said the “government isn’t considering currency intervention at this point.” Policy makers haven’t fully analyzed why the yen is gaining, he said at a press conference today in Tokyo.

“We are seeing the appreciation of the yen, but mainly because of the negative views on the U.S. economy,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “It would be hard for the Japanese government to change the direction of the market because it’s more of a dollar-weakness issue rather than a yen-strength issue.”

The Bank of Japan kept its target lending rate at 0.1 percent at a policy meeting today and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

The Korean won headed for a weekly gain as overseas investors added to their holdings of the nation’s shares for a sixth straight day.

“The won’s attempt to break the 1,230 level is under way,” said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul, the nation’s biggest lender. “There has been a tug of war between importers and exporters, which will keep the currency in a relatively narrow range” between 1,230 and 1,260.

The currency rose 1.3 percent this week, taking its gain for the past three months to 21 percent, Asia’s best performer.

(from Bloomberg, May 21, 2009)

Dubai Faces Further Liquidity Challenges, Says Moody's

13 February 2009
DUBAI - Gulf Arab companies especially in Dubai are facing further liquidity challenges as well as declining credit quality amid the steep global downturn, ratings agency Moody's Investor Service said on Thursday.

"Dubai is particularly vulnerable due to its closer integration with key sectors of the global economy, particularly real estate, tourism, trade and financial services," said Moody's in its 2009 outlook on Arabian Gulf corporates.

While corporate issuers in the region largely remained in a financially strong position in 2008, "overall credit quality in the region has declined, and is likely to continue to do so moving forward."

Moody's estimated that companies in the region require some $35 ?billion to $40 billion in debt refinancing this year.

The Gulf region has seen an unprecedented economic growth in recent years but the worldwide recession took a turn for the worse in the fourth quarter, hitting even the most resilient economies in the region as oil prices which fuelled local real estate markets, also collapsed on weak demand.

"Fundamental credit quality is likely to be tested in the downturn," said Moody's, adding that the Gulf has never before been financially tested on such a large scale.

"Rated gulf corporations are not immune from the global financial and economic crisis, particularly where they rely on external demand for their goods and services, or on fresh liquidity to support their operations", said Moody's.

The ratings agency said Dubai in particular, is facing an unprecedented level of contingent government liabilities, that call into question "less so its willingness, but its ability to support flagship corporates in the event of such a requirement." Dubai's mostly government-run corporates will need to refinance about $15 billion of $70 billion in debts in 2009. The total corporate debt in the Gulf region reached some $20.4 billion last year, heavily concentrated among government-related issuers. UAE issuers made up 90 per cent of total outstanding rated debt, with Dubai alone representing 51 per cent and Abu Dhabi, 39 per cent.

The total rated and unrated ?corporate financing requirements among members of the Gulf Cooperation Council in 2009 is about $35 to $40 billion.

"Addressing these maturities will be a significant challenge, although we expect liquidity to return to the markets as 2009 progresses, and bond spreads to recede from some of the panic-stricken levels seen in the second half of 2008," said Moody's.

It said that as markets re-open, issuers with sound credit fundamentals and government-backing should be able to close financing transactions, but these come at a price."The end of cheap money money has also reached the Middle east, and we expect companies will have to accept far more expensive funding going forward in return for better long term liquidity."

The tougher credit landscape will force companies to reassess their business plans as they respond to the new environment, Moody's said.

Moody's also expressed concern about the recent move of Abu Dhabi to inject Dh16-billion in fresh liquidity to five banks and said this may have a bearing on future credit ratings.

It said the move has been ?interpreted "as a sign that Abu Dhabi is becoming more reticent about supporting banks and other systemically important entities in other emirates."

"Moody's will continue to monitor developments closely. If a trend of selective treatment within the federation becomes discernible, Moody's stands ready to reduce its high support assumptions for government-owned companies in other emirates outside Abu Dhabi."

© Khaleej Times 2009