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Dollar posts further losses as risk aversion rises

LONDON - The dollar hit a record low against the euro on Monday and fresh multi-year lows against the New Zealand dollar and sterling as worries surrounding high-risk US credit continued to sour sentiment on the US currency.

The dollar continued its weak run from last week as investors worried that the meltdown of two Bear Stearns hedge funds heavily invested in risky subprime mortgages signals troubles that could spread to the wider US economy.

More risk averse investors have unwound borrowing in the low-yielding yen, which has been widely used in carry trades to fund higher-return investments. But high-yielding currencies that typically fall in riskier climates have continued to strengthen against the dollar.

“There has been a rise in risk aversion but this has played out in dollar selling rather than a selloff in higher yielders,” said Adam Cole, senior currency strategist at Royal Bank of Canada Capital Markets.

At 0758 GMT the dollar was steady against the euro at $1.3826, having hit an all-time high of $1.3844 earlier in the session, according to Reuters data.

The high-yielding New Zealand dollar was up 0.3 percent versus the greenback, scaling $0.80 for the first time since the currency was floated in 1985.

Sterling hit a fresh 26-year high versus the dollar above $2.06 before paring some gains to trade around $2.0580.

Sharp yen moves

The yen was up against the euro and dollar having moved sharply in Tokyo trading. It touched a six-week peak against the dollar of 120.82 yen, according to Reuters data.

The dollar fell 0.3 percent to 120.85 yen, holding near a six-week low. The dollar had jumped to around 122.20 yen in early Asian trading, only to give up those gains.

“It seems like there is some risk reduction taking place, I guess some unwinding of yen carry trades,” said Yuji Matsuura, joint general manager for Aozora Bank’s forex and derivatives trading group.

Traders said the yen’s initial slide may have partly been due to newspaper polls published on Monday that showed that Japanese Prime Minister Shinzo Abe’s ruling camp looked set to lose a July 29 upper house election after falling further behind the opposition. For details, click on.

The yen’s performance for the rest of the day will likely be driven by the general appetite for risk, analysts said.

”The tone of equity markets today will be used as a barometer for general risk appetite and this will influence how the yen fares,” said Mellon in a note to clients.

The currency matching system of news and information provider Reuters Group Plc suffered a temporary outage on Monday, forcing some traders to switch to alternative venues or trade over the phone.

The outage hobbled trading in currencies primarily traded over the Reuters platform for much of the Asian session, affecting trades in sterling, and the Australian, New Zealand and Canadian dollars.