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High yielding currencies lower as falling stocks weigh

Asian and European shares tracked Wall Street lower after a report on Monday showed the inventory of unsold pre-owned US homes reached a near 16-year high in July, adding to concerns about a sluggish housing market and sapping investor risk appetite.

More reports about banks’ exposure to risky US subprime mortgages also encouraged investors to take risk off the table.

‘People are a bit wary that bad news could come out any second, particularly from the US financial sector, so they are reluctant to get back into carry trades,’ said Chris Turner, head of FX strategy at ING.

‘(US housing data showed) the housing market correction could go longer than expected and that could weigh on expenditure going forward.’

By 0930 GMT the New Zealand dollar -- which offers the highest interest rate in the industrialised world -- was down 1 percent at US$0.7082. The Australian dollar and British pound were down around a third of a percent against the dollar.

The euro found support after a survey showed German business sentiment fell less than predicted, indicating growth momentum in the euro zone’s biggest economy is not slowing as much.

The single currency was trading steady on the day at $1.3648 and 157.74 yen.

Fed rate cut speculation

Recent turbulence in the credit market has fuelled speculation that the Federal Reserve may cut its fed funds rate, after it reduced the discount rate at which banks can borrow directly from the central bank by 50 basis points to 5.75 percent earlier this month.

Given such speculation, investors are awaiting a speech on ‘Housing and Monetary Policy’ by Fed Chairman Ben Bernanke later this week which could offer hints about the future path of Fed policy. Minutes from the Fed’s August meeting are due later.

Investors also awaited the Conference Board’s report on US consumer confidence in August at 1400 GMT to see whether the financial market rout has dented consumer sentiment.

US consumer sentiment is expected to have dropped to 104.0 in August after rising to 112.6 in July, the highest reading since August 2001.

‘We are not yet convinced the Federal Reserve has sufficient comfort on the inflation outlook to reduce its target rate for Federal Funds on Sept. 18,’ HBOS said in a note to clients.

‘On balance we expect a gradual deterioration in economic data - starting with US consumer confidence and extending from there - over the days and weeks ahead. This won’t happen fast enough to prompt a Fed easing on 1Sept. 18, but it will undermine the bullish case for risky assets.’