By Ye Xie
Oct. 25 (Bloomberg) -- The dollar gained the most in 16 years against the currencies of six major U.S. trading partners as a global economic slowdown spurred demand for the greenback as a haven from losses in emerging markets.
``The foreign-exchange market is basically saying we are in a global recession and perhaps a very, very deep one,'' Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in an interview on Bloomberg Radio. ``Any sense of rationality and fundamentals is thrown out the window.''
Japan's yen also benefited as investors fled high-risk assets and used the proceeds to pay back low-cost loans taken out in the currency. The yen climbed to a 13-year high against the dollar this week and surged to its strongest level against the euro in six years. The pound fell below $1.53 in its biggest weekly drop since investor George Soros drove sterling out of Europe's system of linked exchange rates in 1992.
The dollar appreciated 6 percent to $1.2623 per euro this week, from $1.3410 on Oct. 17. The currency touched $1.2497 per euro yesterday, the strongest since October 2006. The yen rallied 7.8 percent to 94.32 per dollar from 101.69, and touched 90.93 yesterday, its highest level since August 1995. Against the euro, the yen climbed 12.7 percent to 118.96 from 136.21. It touched 113.81 yesterday, the strongest since May 2002.
This week's decline in the euro was its biggest against the dollar and the yen since the 15-nation currency's inception in January 1999. The yen's gain versus the dollar was the biggest since October 1998.
Dollar Index
ICE Futures' Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, rose 4.9 percent this week, the most since September 1992. It touched 86.97 yesterday, the highest level since October 2006.
``We are in a financial crisis,'' said Richard Clarida, a global strategist at Newport Beach, California-based Pacific Investment Management Co., which oversees $830 billion in assets, including the world's biggest bond fund. ``The flight to quality is boosting the dollar and the yen.''
Emerging-market currencies tumbled as Argentina seized private pension funds, and Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. Brazil's real dropped 8.2 percent to 2.3075 against the dollar, the South African rand decreased 10.4 percent to 11.18 and the Russian ruble fell 3.2 percent to 27.1991.
Weaker Pound
The pound depreciated 8 percent after the Office for National Statistics said U.K. gross domestic product contracted in the third quarter for the first time since 1992. Sterling's drop was its biggest since Black Wednesday in September 1992, when the U.K. was driven from Europe's exchange-rate mechanism. It reached $1.5269 yesterday, the lowest level since August 2002. Against the euro, the pound touched a record low of 81.96 pence.
The yen gained 19 percent this week to 58.72 against the Australian dollar and 19 percent to 52.47 versus the New Zealand currency on speculation a rout in global stocks will encourage investors to unwind trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia and 6.5 percent in New Zealand.
``I've never seen this before in terms of global financial market carnage,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Those who haven't got out of the yen carry trade will have to watch it collapse.''
Plunge in Stocks
The Standard & Poor's 500 Index dropped 6.8 percent this week, and the Dow Jones Industrial Average fell 5.4 percent. Trading in futures on the S&P 500 and the Dow was limited yesterday after declines in the contracts of more than 6 percent triggered a so-called limit-down restriction.
Volatility on one-month dollar-yen options, a measure of expectations for future price swings, surged to 41.79 percent yesterday, the highest since Bloomberg began compiling data in December 1995. Greater fluctuation may cut carry trade profits.
Abrupt moves in Japan's currency may hurt the world's second-largest economy, Vice Finance Minister Kazuyuki Sugimoto said yesterday. He told reporters in Tokyo that ``we'll carefully watch'' fluctuation in foreign exchange.
When the yen touched a post-World War II high of 79.75 against the dollar on April 19, 1995, the Group of Seven nations intervened by buying the greenback to stabilize currency markets. The G-7 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
The dollar has ``little significant support'' versus the yen between today's and the postwar level, Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, wrote in a research note.
The yen may appreciate to about 129 against the pound, a level not seen since 1995, wrote Edgeley, who uses charts of historical prices to predict currency moves.
