Currency Trading: Support Seen For Dollar, Yen

The statement issued Saturday by the Group of 20 developed and
emerging-market nations is unlikely to assuage fears of currency investors
plagued by the financial and economic crises. G-20 officials vowed bold action in various areas in the statement released during the group's weekend summit in Washington. The group's statement was more
elaborate than the one released by the Group of Seven leading industrialized
nations in October. But currency strategists said the G-20 statement focuses on future plans and lacks specificity on action items. The absence of a "wow" factor may disappoint investors who had high hopes for the summit's outcome, they said.

As a result, investors are likely to keep seeking safety in low-yielding
currencies such as the U.S. dollar and the yen at the cost of other currencies
amid worries about recession, especially in countries with relatively bleaker
economic outlooks and in weaker fiscal health, such as the U.K. Turkey and South Africa. "On this statement alone the dollar will get support as will the yen as it includes nothing specific," said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. Mr. O'Neill said there is a large "to do" list for the G-20 and that if they achieve much of it by March, "the world will be a better place. Then risky assets will be performing better. The dollar and yen will be lower."But in the near term, the situation remains grim, with the continuing financial crisis and the rising risk of a prolonged and deep global recession. Adding to the poor sentiment is the continued trend of a reduction in the use of borrowed money to
magnify returns, as investors world-wide shy away from risk. That may gain
momentum as the year-end approaches.

Strategists said that the G-20 statement may quickly fade into memory as
investors turn their attention to macroeconomic data and headlines about banks, auto makers and hedge funds. The performance of global stock markets, which have become an indicator of investors' appetite for risk, likely will continue to be among the forces driving the currency market.
Commodity-linked currencies, ranging from the Australian, New Zealand and
Canadian dollars to the Norwegian krone, may suffer further declines if
crude-oil prices continue to fall. Late Friday in New York, the euro was at $1.2691 from $1.2853 late Thursday, while the dollar was at 97.10 yen from 97.82 yen. The euro was at 123.90 yen from 125.73 yen. The dollar was at 1.1920 Swiss francs from 1.1834 francs Thursday, while the U.K. pound was at $1.4795 from $1.4888.

Analysts expect the euro to trade this week in a wide range between $1.23 and $1.2950, with a risk that it drops below that range. Meanwhile, the dollar could trade between 91.50 yen and 98.50 yen. The U.K. pound was one of the biggest losers last week, dropping below $1.50 for the first time since 2002. The pound tumbled to a record low versus the euro as the British economy slid into recession.

"The pound is vulnerable," said Boris Schlossberg, director of currency
research at GFT Forex in New York. "There is concern that the U.K. may be the next Iceland." There is no regular measure of daily trading volumes across foreign-exchange markets, but analysts and traders in various banking institutions confirm that low liquidity has contributed to high levels of currency-market volatility. This culminated in late October, when one-month at-the-money euro-dollar implied volatility rose near 30.0%, while dollar-yen volatility rose above 40.0% and euro-yen volatility rose to 54.0%. These levels have since eased, but they remain elevated.
Many traders believe the worst volatility, and low liquidity, is over. Thanos
Papasavvas, head of currency management at Investec Asset Management, said his team has put on more risk this month compared with the past six months, and is looking for opportunities to take positions.