The dollar jumped 1 percent against the yen on Tuesday, as shock at the failure of the US Congress to approve a $700 billion bank bailout plan gave way to cautious optimism that a deal may yet be reached. Talk that US lawmakers may reach some kind of agreement by the end of the week and speculation that central banks could slash interest rates allowed risk aversion to ease, with US stock futures rebounding after Wall Street on Monday experienced its biggest one-day percentage loss since 1987.
Trading continues to be dominated by waves of volatility, however, making it difficult for currencies to establish firm direction. "We're seeing dollar/yen bounce around as optimism ebbs and flows about the US bailout package, but we're not getting a trend," Standard Bank currency analyst Steve Barrow said.
"Markets tend to move when we're pretty certain about something. Here everyone's flying blind," he said, describing volatility as "astronomical". Implied one month dollar/yen volatility jumped to its highest since mid March at 19.1 percent. The dollar slumped to a four-month low against the yen at 103.50 on trading platform EBS as investors scrambled into safe haven assets after US lawmakers unexpectedly rejected the unprecedented rescue deal, which should have injected some life into frozen money markets.
But by 1104 GMT, the dollar was up 1.1 percent against the yen to 105.19, according to Reuters data. The euro fell 0.6 percent to $1.4416 and by 0.1 percent against the yen to 150.27. The euro and the pound made very little headway against the dollar, staying not far above the 10-day lows reached on Monday as evidence continued to highlight the international complexion of the banking crisis.
The French government took a 25 percent stake in Belgian-French financial services group Dexia after a capital injection of 6.4 billion euros by France, Belgium and Luxembourg to shore it up. Ireland's government announced a scheme to safeguard deposits on Irish banks, which it said guarantees around 400 bln euros of liabilities.
Banks in Britain, Belgium, Russia, Iceland and the United States have been rescued by authorities so far this week, prompting mammoth injections of cash into the global banking system by central banks on Monday aimed at lubricating money markets. But interbank rates remained painfully high, showing the central banks have not succeeded in easing credit tightness. The market expects US consumer confidence data and the latest purchasing managers' index on Chicago manufacturing activity later on Tuesday to underline the weakness of the US economy.
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