Risk Aversion Dominant

Risk aversion has returned and recent big winners like the commodity linked Australian and New Zealand dollars have fallen full percentage points in currency markets. Falling stocks in the US, Europe and Asia have pared demand for risky assets. Tokyo’s Nikkei fell 0.5%on Friday and the Standard and Poor’s 500 index posted the biggest one day percentage decline in three weeks. Stuart Bennett of  Calyon stated, “Risk aversion seems to be dominating at the moment and may continue to do so. That said, there hasn’t been much by way of new information to induce a fresh wave of uncertainty.” Many investors have sold shares and bought short term treasuries to minimize losses before years end.

Bank of Japan Says Economy Improving

On Friday the dollar index DXY was up 0.6% at 75.770 .DXY, above the fifteen month low of 74.679 hit last Monday. The dollar rose 0.3% against the euro $1.4862 and against the yen the euro traded at 132.09 yen. The dollar fell 0.9% against the yen and traded at 88.88 yen. The Bank of Japan left rates at 0.1% and a bank policy meeting raised its economic assessment saying the economy is improving. Adam Cole of the Royal Bank of Canada said, “The yen won’t materially sell off until we see a rise in U.S. interest rates.” US Treasury two year note yields fell to the lowest this year as investors remain concerned that the demand for higher yielding assets has outpaced US economic growth prospects.

Trichet Warns Crisis Not Over

Markets failed to react to comments by European Central Bank President Jean-Claude Trichet who said it was too early to say that the recession is over. The Kiwi dollar fell more than 2% on Thursday and the losses were extended on Friday. Against the US dollar the Kiwi traded at $0.7256. Trading is expected to be light next week as Japanese markets close for a national holiday on Monday and US markets will close on Thursday for Thanksgiving.