• Home
• /
• Business

Dollar gains on Korea skirmish, euro zone debt worries

LONDON - The dollar rose on Tuesday after North Korea shelled a South Korean island, adding geopolitical tension to Europe’s debt crisis and driving investors to the relative safety of the U.S. currency.

The shelling by North Korea triggered return fire by the South, military and South Korean media reported, exacerbating the risk aversion gripping global financial markets heading into year end..

“Tension in the region has led to knee-jerk reaction in currencies and stocks but they tend not to have an everlasting impact,” said Paul Robson, currency strategist at RBS Global Banking.

“Focus will shift back to the euro and we believe euro zone peripheral issues have some more time to run. Investors will go after Portugal and then Spain after Ireland is done.”

Trading was choppy in Asia with a holiday in Japan reducing liquidity. These conditions were seen prevailing this week with the U.S. Thanksgiving holiday looming.

The dollar index was up 0.3 percent at 78.90, but off its intra-day high of 79.116. The euro was down 0.4 percent on the day at $1.3561, dropping from around $1.3600 when the Korean clash was reported. Against the safe-haven Swiss franc, the euro was down 0.4 percent at 1.3431 francs.

The dollar was up 0.4 percent against the yen at 83.65 yen, from 83.40 yen before the shelling began. Traders said macro funds buying the dollar after the shelling began ran into offers from Japanese exporters. More exporter offers were seen at 83.80-84.00 yen level.

“Military skirmishes on the Korean peninsula are not helping investors in local equity markets,” said Chris Turner, chief currency strategist at ING. “Dollar/yen is trending higher and some better U.S. activity data and higher U.S. yields could take dollar/yen above 84.”

CONFIDENCE IN EURO BRITTLE

The skirmishes are likely to heighten anxiety amongst investors already on edge over the euro zone debt crisis. Many are not convinced aid to Ireland will prevent other heavily- indebted members of the 16-country bloc from seeking aid.

Indeed, Canada’s finance minister said on Monday he was pressing the European Union to address the Portuguese debt crisis quickly, although he fell short of saying the country would need a bailout like Ireland.

Portugal and Spain are seen as the next weakest links.

Irish Prime Minister Brian Cowen defied pressure to quit, saying on Monday he would stay in office until parliament passed a budget on Dec. 7, then call an election.

The euro was already down 5 percent against the greenback this month, retreating from a nine-month high hit on Nov. 4.

Support for the euro is seen at $1.3446, the Nov. 16 trough, a break of which could pave the way for a retest of $1.3333, the August high, which some analysts said would confirm a developing downtrend for the single currency.

The euro was flat at 113.48 yen, well below Monday’s highs of 114.98 yen.

Both the Australian and the New Zealand dollar shed more than 1 percent as the tensions on the Korean peninsula prompted investors to unwind some long positions built in those high-yielding currencies.

The Australian dollar was down nearly 0.9 percent at $0.9805 while the kiwi lost more than 1 percent to fall to $0.7652, its lowest since Nov. 17.