The dollar’s woes were exacerbated as more evidence of problems in the subprime mortgage market were revealed yesterday – triggering a sharp sell-off to record lows against the euro at 1.3786 and a new 26-year low versus the sterling at 2.0285. The heightened risk aversion also prompted speculators to scale back carry trade positions, sending the yen sharply higher – climbing to 120.96 versus the greenbucks and recovered from all-time lows against the euro.
The main catalyst was attributed to S&P’s announcement that it would possibly downgrade nearly $12 billion in subprime mortgage-backed US bonds. The move could potentially add more instability to financial markets and raising warning flags of spillover effects to other sectors of the economy. Also boding poorly for the housing market and consequently, the US economy were earnings reports – in which Home Depot signaled further weakness ahead by issuing profit warnings due to the housing slump.
The euro finally surpassed its previous record high against the dollar set in April, jumping to 1.3786 amid renewed fears from the US housing market. The single currency is poised for further gains this week ahead of several key Eurozone economic reports, set to reveal greater divergence between the US and Eurozone economies.
Source: forexnews.com
Author: Korman Tam
This gives the answer why carrys are unwinding at the moment and support my analysis of a long term bear bias is still intact.
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