PARIS: The great market upheaval of 2008 has stripped 45 percent from the value of global equities, led bank lending to nearly dry up and caused commodity prices to crash from stratospheric heights. And now, paradoxically, it is helping to lift the long-suffering dollar.
The U.S. currency has been on rampage of late, gaining 15.5 percent against a basket of currencies since Aug. 1. As stock markets sank again Wednesday, the dollar rose against its European counterparts, with the British pound falling to $1.6242, a five-year low, and the euro falling to $1.2843, near a two-year low. Only the yen, on a tear of its own, has been stronger.
World leaders, who will meet Nov. 15 in Washington for a crisis summit meeting, could be forgiven for seeing some irony in the fact that the currency of the country where the global crisis began should be seen as a haven.
Just six months ago, on April 22, the euro rose to over $1.60 for the first time, while the pound was trading at $2.
But after it became evident in August that the combination of tight credit and commodity price shock was weighing on the real economy, the dollar suddenly took off, said Kathleen Stephansen, head of global economic research in New York for Credit Suisse.
The dollar's rebound "is a sign of real panic and risk aversion," she said, as investors liquidate investments bought at a time when interest rates heavily favored European assets. Institutional investors, faced with losses suffered on U.S. investments, are also liquidating overseas assets to meet margin calls, she said. That adds to the dollar's strength when the foreign currencies are sold for dollars.
Derek Halpenny, senior currency economist in London for Bank of Tokyo-Mitsubishi UFJ, agreed. Returns "are no longer the driver" for investors, he said. "It's about capital protection now."
Central banks everywhere have moved to an emphasis on supporting economic growth from a focus on inflation. As a result, investors expect more and faster interest rate cuts in Europe, bringing the rates closer to their U.S. and Japanese counterparts, which would make investing in short-term European assets less of a draw. After the coordinated interest rate cuts of Oct. 8, the U.S. Federal Reserve's benchmark overnight rate stands at 1.5 percent, while the European Central Bank's is 3.75 percent. The Bank of England's main rate is 4.5 percent.
Prime Minister Gordon Brown of Britain said Wednesday that Britain and other major economies were likely to fall into recession, following similar comments from Mervyn King, the Bank of England governor.
King alluded Tuesday night to another problem that was hurting the pound, one that could have consequences for the United States and other countries that are net borrowers: the question of who will pay for the huge bank rescues announced this month.
Foreign capital flows into Britain have fallen sharply, King said, and if they are not replaced by other forms of external finance, Britain will have to rapidly reduce its imports and the pound will have to fall to make up the difference.
The great exception to this dollar strength is the yen. At ¥98.22, the dollar is not far above levels last seen in 1995. The yen is benefiting from flight-to-safety buying of its own, economists said, even though the Bank of Japan's main interest rate target, at 0.5 percent, is the lowest of any major economy.
But while the decline in European currencies could bolster the fortunes of European exporters, the yen is at a level to cause intense pain to Japanese manufacturers.
"At these exchange rates and with the downturn in the world economy, Japan could be headed for depression, not just a recession, as they've been completely dependent on exports for growth," said Norbert Walter, chief economist of Deutsche Bank in Frankfurt.
But Walter also was skeptical that the yen or the dollar would hold their newly won ground, at least in the longer term.
"I don't think it's right to read these exchange rate moves as changes in the trend," Walter said. "I don't believe it will last."
Stephansen, at Credit Suisse, said: "The process of realignment in the global economy will be an arduous one. So we're likely to have even more volatility in both economic data and in the markets."
The carnage in stocks continued Wednesday, with the Dow Jones industrial average dropping 4.1 percent in late trading on Wall Street, and the Standard & Poor's 500-stock index falling 4.5 percent. In Europe, the Euro Stoxx 50, a barometer of euro-zone blue chips, slid 5.4 percent, while the FTSE 100 in London fell 4.5 percent. The CAC 40 in Paris declined 5.1 percent, while the DAX in Frankfurt dropped 4.5 percent.
Improvements in the credit markets - including the third straight day of declines in bank borrowing rates - did little to placate stock investors who have now begun to focus on the corporate consequences of what may be a steep downturn. Earnings reports have been weak this weak, and many companies have warned about lower sales and a bleak outlook for the remainder of the year.
In Tokyo, the Nikkei 225 tumbled 6.8 percent after three sessions of gains as the yen surged. In Sydney, the S&P/ASX 200 closed 3.4 percent lower. The Hang Seng index in Hong Kong fell 5.1 percent, as Citic Pacific fell almost 25 percent. The company this week predicted a trading loss of up to $2 billion caused by what it said were unauthorized bets on foreign exchange markets.
The declines in stocks overshadowed an encouraging milestone for oil prices, which fell below $68 a barrel - a low for the year. Crude oil for December delivery was down $4.98 at $67.20 a barrel in afternoon trading Wednesday in New York.
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