Dollar volatility could lead to global disaster
THE sharp volatility of dollar-yen trading has raised fears of a collapse in the global interbank system and a global credit crunch, which will inevitably lead to a global depression, analysts say.
''If the dollar keeps on falling dramatically, it will intercept the global interbank system,'' a banking expert said.
''Clearings between banks will be hurled into turmoil. And the whole system might collapse. I believe the US needs to do something urgently to halt the sharp dollar decline.''
On Friday the dollar crawled down to between YEN 117 and YEN 118, against YEN 112.35-38 on Thursday, with follow-up hedge sales led by Japanese operators. At one point on Thursday, the dollar hit YEN 110 in London trade -- it rose more than YEN 10 in a single trading day, something unheard of in 25 years. It was a repeat of the dollar's rout on Wednesday when it lost YEN 11.
Apart from the bearish mood with the prospect of weakened US economy, the yen rally could also be explained by the unwinding of the hedge funds' positions as their banks had been recalling their margins.
''There are some guys out there who like to deal in huge sums. And when their foreign exchange positions could be cleared in the market, the exchange rates moved very significantly,'' said a trader at an American bank.
''Given the size of the hedge funds, which have been accumulating their (dollar-yen) positions for quite some time, they created a big impact when they stormed out of the market.''
Already Japan is facing a credit crunch because its banking system is in shambles. If the volatility keeps on affecting the US financial markets, the crunch will come to a full global cycle, although Europe is in a better position than the US to fend off the financial turmoil.
Bank experts said the foreign exchange markets have been disappointed with a marginal cut in the US interest rates, suspecting that US Federal Reserve Board chairman Alan Greenspan had lost the fight to more hawkish members, who were reluctant to bring down the US rates.
The cuts of only 0.25 per cent in the Fed fund rate late last month represented only a compromise, prompting Greenspan to come out with comments in hopes of wooing public support for a steeper cut in the interest rates in the next round of the Fed meeting.
Earlier Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister, said the sharp rise of the yen against the US dollar is not necessarily a positive development for Asia's struggling economies. He called for action to create dollar-yen stability, so that international trade and investment would not be affected.
In terms of baht-yen exchange rates, the movements were also volatile. At YEN 130 to the dollar, YEN 1 was quoted at 30 satang. Late Thursday evening, the yen moved to 34.5 satang, a swing of 15 per cent in one day.
''Given this volatility, it is difficult to conduct business or trade because nobody knows what the price settlement will be. Thailand does a lot of trade and investment with Japan,'' a trader at an American bank said.
The dollar-baht rate also moved to the downside, trading as low as Bt38.45 after opening at Bt38.70-75. On Thursday, there were reports that the Bank of Thailand bought dollars in the spot market and also injected money market liquidity to keep the baht rates soft.
There was no confirmation of the BOT intervention on Friday to limit the baht strength.
BY VATCHARA CHAROONSANTIKUL AND THANONG KHANTHONG