Risk avoiding investors boost dollar, yen

08:16, August 12, 2010      

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The U.S. dollar rallied against the euro and sterling pound on Wednesday as investors worried about recovery and tried to avoid risky assets. The Japanese yen was the only major currency to rise against the greenback, reaching a 15-year high.

In the U.S. Federal Reserve's latest assessment of economic conditions, the policy makers said that "the pace of recovery in output and employment has slowed in recent months," which was a big change from its previous statement in June that the economy was "proceeding."

The Fed's gloomier view of the economy soured market sentiment. The CBOE Volatility Index, a gauge to measure how panic the investors are, surged 13.3 percent on Wednesday.

Wednesday's data continued to pressure the market, as the U.S. trade deficit unexpectedly widened in June to 49.9 billion dollars, the highest level since October 2008.

Risk aversion dominated the market, and the dollar index rose nearly 2 percent on Wednesday. It is the greenback's largest one- day gain since December 2008.

The dollar reversed a falling trend and gained momentum this week. In a statement issued after its one-day rate-setting meeting on Tuesday, the Fed announced that it will use the proceeds from its investments in mortgage bonds to buy government debt on a small scale. The stimulus plan could help send long-term rates on mortgages and corporate debt slightly lower. The Fed's moves helped boost the dollar.

Yields on U.S. government debt tumbled as investors poured into Treasury, which they consider as super-safe purchases.

On Wednesday, the euro fell below 1.30 dollars against the dollar, which was the first time this month for the 16-nation common currency to break the level. In late New York trading, the euro fell to 1.2882 dollars from 1.3196 late Tuesday, and the British pound retreated to 1.5672 dollars from 1.5881.

However, the dollar tumbled to as low as 84.75 yen on Wednesday, the lowest level since July 1995. It bounced back to 85.24 yen in late trading, compared with 85.27 late Tuesday.

In other trading, the dollar rose to 1.0581 Swiss francs from 1. 0487 and rallied to 1.0466 Canadian dollars from 1.0318 late Tuesday.



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