LONDON (Thomson Financial) - The dollar stayed well bid as stocks market got off to another round of falls after a dismal performance on Wall Street overnight.
While the fallout on US sub-prime sector has rendered the country's credit market a no-go area, funds are flocking to US fixed income assets -- a key factor boosting the dollar.
Notably, the euro slipped under 1.35 usd for the first time since end June, the drop all the more noticeable as the euro had stood over 1.38 usd just a week ago.
'Risk aversion remained the topic of the day, with the financial sector leading European stock market declines,' BNP Paribas (other-otc: BNPQY.PK - news - people ) analysts said.
Steve Pearson (nyse: PSO - news - people ) at HBOS pointed out that the dollar has been boosted by safe haven type flows and that the effect has been exaggerated by positioning.
The dollar in enjoying good demand what with many players are starting from an underweight position in US stocks and bonds. Additionally, outflows of US domestic capital to emerging markets is dropping, he said.
These factors, he believes, will 'amply offset the reduction in foreign buying of US credit products.'
Markets will be next looking at US inflation data. If the figures fall short of expectations, the dollar may lose some of its recently gained ground as the case for a US rate cut will strengthen.
The headline US consumer price index is forecast to rise by 0.1 pct while the core rate is seen at 0.2 pct. Both rose 0.2 pct in June.
Analysts at BNP Paribas said shelter costs could be key in the core rate.
That aside, the recent market turbulence caused by the fallout in the US subprime market seems to have slowed after the series of interventions from major central banks, particularly the European Central Bank.
For now, concerns over liquidity have appear to have abated -- judging by the relative steadiness in overnight interbank rates, said Neill Mellor at Bank of New York (nyse: BK - news - people ) Mellon.
'But it seems clear that instilling sustainable stability in the market is a work in progress. Markets will presumably now turn to central banks for their response to the latest stage of the current crisis,' he added.
In line with the trend of risk aversion, the yen was higher across the board, much at the expense of higher yielding currencies such at the Aussie and Kiwi dollars.
Elsewhere, the pound's falls accelerated after news of a drop in wages and a dovish set of minutes from the Bank of England added to the argument that UK interest rates have already peaked.
The UK currency had started the day on the back foot after surprisingly weak inflation figures were released yesterday.
In data out today, the theme continued. Earnings growth in the UK fell unexpectedly in the three months to June to the lowest level in four years, official figures showed. The Office of National Statistics said average earnings growth, including bonuses, slowed to 3.3 pct in the three months to June -- the weakest rate since June 2003 -- from 3.5 pct in the three months to May.
Additionally, the prospect of another interest rate hike from the Bank of England in the next couple of months diminished further with the news that the rate-setting body voted unanimously to keep its benchmark interest rate unchanged at 5.75 pct at its meeting earlier this month.
Minutes to the August 2 meeting show that the nine-member panel did not even discuss the need for a back-to-back rate rise to 6.00 pct, and that most members emphasised that they had no firm view on whether rates actually need to rise further.
The non-committal message weighed on the pound and it looks like the currency is set for a period of falls, analysts said.
'We remain of the view that rates will not have to rise again and 5.75 pct marks the peak in the current cycle,' said David Page at Investec.
After all, financial developments, while still inconclusive, have worsened since the bank last met; news on the international outlook has deteriorated modestly and headline inflation has dropped unexpectedly below target, he said.
London 1203 GMT London 0816 GMT
US dollar
yen 116.75 down from 116.88
chf 1.2166 up from 1.2140
Euro
usd 1.3474 down from 1.3492
yen 157.33 down from 157.66
sfr 1.6385 unchanged 1.6385
stg 0.6779 up from 0.6777
Sterling
usd 1.9882 down from 1.9900
yen 232.10 down from 232.60
sfr 2.4176 up from 2.4166
Australian dollar
usd 0.8222 down from 0.8384
stg 0.4156 down from 0.4161
yen 95.99 down from 96.82
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