Stock Declines Raise Risk Aversion

Safe Haven Demand Rising

Both the Japanese yen and the US dollar rose against the euro for the second day due to declining Asian stocks and risk aversion among investors. Rising risk aversion has increased demand for both currencies traditionally seen as safe havens. The London Sunday Times reported that Lloyds Banking Group may post losses of 13 billion pounds ($ 20.9 billion USD) increasing demand for the safe haven of the yen. Also affecting currency exchange r was a Wall Street Journal report that said that some major US airlines may have to file for bankruptcy. The report said that American Airlines and Delta may be forced to file Chapter 11 bankruptcy unless liquidity improves.

Asian Stocks Decline

A decline in Asian stocks drove risk aversion higher and the yen traded higher against the 16 most traded currencies. Philip Wee of DBS Group Holdings Ltd. Stated, “Currencies will stay sensitive to downside risks in equities worldwide. Markets may seek safety in the yen and the dollar as they adjust their bullish positions accumulated during the March-June rebound from the crisis.”

Banking Giant Lloyd’s to Post Massive Losses

The pound fell against the dollar after a report in the Sunday Times which said that Lloyds may post losses of 13 billion pounds. ($ 20.9 billion USD). Yousuke Hosokawa of Chuo Mitsui Trust & Banking Co. stated, “The Times report rekindled concerns about the health of the financial system in Europe, which is believed to have a bigger exposure to non-performing loans than U.S. banks. The risk-averse sentiment will favor the yen.” Last month the European Central Bank said that commercial banks in the euro zone may lose $ 283 billion by the end of next year as the global recession forces the banks to write off bad loans.

ECB Will Leave Interest Rates in Place

Also affecting Forex markets was a report by the ECB which said that its interest rates are appropriate and that the euro zone economy will recover in 2010. On July 2nd the central bank left its 1% interest rate unchanged in an attempt to stimulate euro zone growth.