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More tea leaves in the cup for 2006. - kwc Political,
event risks stack up against dollar LONDON - Investors'
appetite for risk is expected to wane as global uncertainty moves into focus, with
the dollar seen as a casualty as its fundamental safety barriers fall
away. §
Simmering
geo-political tensions are rising with Iran's decision his week to remove U.N.
seals at its uranium-enrichment plant to resume nuclear fuel research --
prompting Western fears that Tehran is bent on acquiring the means to build
atomic bombs. §
Israeli-Palestinian
peace is also under the spotlight with uncertainty shrouding the future of
Middle-East diplomacy as the health of Israeli Premier Ariel Sharon hangs in
the balance. §
European
markets are also nervously watching Turkey as it battles to contain an outbreak
of deadly bird flu in humans, while China has also reported a fresh outbreak in
poultry. "For the dollar
with large external deficits, risk aversion is definitely going to play a part.
I think the market is going to act more negatively on the dollar than it did in
2005," UBS currency strategist Adam Myers said. "The dollar doesn't have the cushion it did back then
-- basically rising interest rates -- and that will be a huge factor," he
added. After posting gains of 15 percent against
the euro and Japanese yen last year, the dollar has lost nearly 2 percent
against the single currency and three percent against the yen so far in
2006. Analysts say this is mainly
due to growing belief that an 18-month era of dollar-boosting interest rate
rises will end soon -- exposing the dollar's massive current account and trade
deficits. Oil
Key Oil price rises in the wake of
heightened Middle East tensions, which had been pretty well absorbed by
currency markets in the past year, was seen as a key pressure point going
forward. "Given that oil has
been a persistent pressure on corporate balance sheets over the last two years,
any signs of instability in the Middle East would only contribute to the
market's perception of a very tight global supply demand balance in 2006,"
Tullett Prebon G7 market economist Lena Komileva said. U.S. crude oil futures
<CLc1> were edging toward $64 a barrel on Wednesday on Iran's decision to
resume nuclear fuel research despite the strong global objections. RBC Capital Markets
strategist Tania Kotsos said in a note that risk aversion trades could come back into vogue.
"We highlight that risk aversion trades, particularly Swiss franc
bullish, may increase if Iran's nuclear ambitions result in a referral to the
U.N. Security Council for possible sanctions, which could also pressure oil
prices higher if the situation deteriorates. Risk reversals are
showing an increasing bias toward Swiss franc calls, the right to buy the Swiss
franc. One-month risk reversals are trading with their strongest skew toward
Swiss franc calls since March 2005 <CHF1MRRFIX=>. Meanwhile the other
classic safe-haven play gold, <XAU=> hit a 25-year high this week over
$550 per ounce. Tullett's Komileva
said the dollar and sterling, which have tended to suffer in the past from
deterioration in the political climate, could be pressured with uncertainty
over Middle East foreign policy. "It will also
affect other currencies such as the yen..., which is more closely connected
with the equity markets and tend to under-perform during periods of a weak risk
appetite," she said. Calm
on Bird Flu, for now Markets were keeping a cautious eye on
developments in Turkey's battle with bird flu, with any escalation of the
outbreak nearer to Western Europe seen having an immediate impact on the euro. The United Nations
Food and Agriculture Organization (FAO) said on Wednesday that the Turkey bird
flu virus posed a serious risk to neighboring countries. "Markets are looking at this
calmly but seriously. If it (bird flu) got air-borne then people might start
assessing the situation in a totally different light," HSBC currency
strategist David Bloom said. UBS Myers noted that
the Turkish lira <TRY=> had sold off heavily on Tuesday in the wake of
ramifications on avian flu.
"Depending on how quickly bird flu cases spread and how near they
are to Western Europe, they will have a negative effect on the euro," he
said. "It would require
spreading and a much larger volume of cases for a bigger impact on FX
markets." |
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