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As Egypt Worries Spark Safe-Haven Bids
NEW YORK (Dow Jones)–The euro weakened broadly and sharply Friday as concerns about political unrest in Egypt sparked demand for safe-haven currencies such as the dollar, Swiss franc and euro.
After having spent most of the week ignoring the crisis in Egypt, traders became transfixed by images of pro-democracy demonstrators embroiled in street protests with government forces. This led investors to abandon risk-related investments in favor of safe-harbor assets amid worries about the potential for spillover effects worldwide.
With the euro already under pressure from constructive U.S. economic data, the figures coalesced with the market’s jitters about Egypt. Despite concerns about the U.S.’s fiscal imbalance, both Treasurys and the dollar rallied as they momentarily reverted to their traditional role as safe harbors during times of global instability.
“We’re going to watch over the weekend to see how aflame [Egypt] becomes,” said Andrew B. Busch, global currency strategist at BMO Capital Markets in Chicago, who said markets were modestly heartened by the data. However: “risk-off is happening because once you destabilize Egypt, you destabilize the Israel peace process and embolden Iran,” he added.
“Risk off” trades typically bolster the dollar, U.S. Treasurys, the Swiss franc and other assets perceived as safe havens.
The euro fell to session lows around $1.3594, more than a full cent below an earlier session high. The euro fell by more than 2% against the yen to trade at 111.63. Against the yen, the dollar was also sharply weaker on the day, trading near 82. Against the Swiss franc, the euro traded near 1.2820.
Speaking from Davos, German Chancellor Angela Merkel launched a strong defense of the euro, saying it was “more than a currency” and its failure would doom Europe. However, jittery markets largely ignored her remarks. Dealers said the market was becoming increasingly impatient with the lack of progress in Europe’s debt crisis.
“There has been very little resolution on the debt front, and in fact there has been more tension,” said John McCarthy, manager of currency trading at ING Capital Markets in New York.
“We’re getting to a level in euro/dollar where, based on concerns about European peripheral debt issue that have not gone away,” traders are becoming increasingly reluctant to take the single currency much higher, he added.
Dealers say the yen has been buoyed by both exporter demand for the currency and modest safe-haven flows. At least for the moment, analysts say concerns about Thursday’s Japanese sovereign debt downgrade by Standard & Poor’s have abated.
“Japan and their huge exporting companies have clearly become accustomed to the strong yen and are clearly taking every chance they get to buy in when there is a selloff,” said Western Union Business Solutions in a research note. “Even with the credit downgrade, investors don’t seem too worried about piling their cash into the Land of the Rising Sun and still see it as a bastion of safety.”
-By Javier E. David, Dow Jones Newswires; 212-416-4564; email@example.com