The dollar fell against the euro and yen in volatile trade on Thursday as losses in US investment banking stocks and doubts over the bailout of insurer American International Group fuelled financial sector fears. Shares of Morgan Stanley and larger rival Goldman Sachs plunged on Wednesday.
Stoking talk that Wall Steet's two surviving big investment banks may have to join up with a commercial bank to survive the intensifying credit contraction. Morgan Stanley has held preliminary take-over talks with Wachovia Corp a person familiar with the situation told Reuters. Separately, CNBC reported that Morgan Stanley was in talks with China's CITIC while HSBC was also cited as a possible suitor for the No 2 US investment bank.
But a senior CITIC Securities executive said on Thursday the firm was not holding any talks on a possible investment in Morgan Stanley. Take-over reports also swirled over weakened top US saving bank Washington Mutual, major British mortgage lender HBOS and others.
"The dollar's weakness stems from being at the centre of the global financial crisis, but that crisis is also forcing investors to repatriate dollars, presenting a mixed picture to the market," said Kengo Suzuki, a currency strategist at Shinko Securities. Traders said flows related to the liquidation of previous trades was dominating currency moves, making price action very volatile and tough to forecast.
The euro rose 0.4 percent from late New York trade to $1.4382. The euro was up 0.3 percent at 150.40 yen after choppy trade that briefly pushed it as high as 150.96 yen on EBS. The short spike in the euro helped other currencies such as the Australian and New Zealand dollars gain against the dollar and the yen, but the effect was fleeting.
The dollar was down 0.1 percent at 104.55 yen after swinging between an early low of 104.13 yen and the day's high of 104.94 yen. The US currency had hit a four-month low of 103.54 yen on Tuesday. Trade was extremely light, exaggerating market moves, as investors retreated to the sidelines due to fear of further trouble in the banking sector, traders said.
"Investors are much too pessimistic about the US financial sector," said Tsutomu Soma, senior manager of foreign assets at Okasan Securities. "Because of that, any positive news such as a merger agreements between banks or new steps to help stabilise financial markets from the Fed could easily boost the dollar," Soma said.
Market players said growing worries about the dollar may have been more clearly reflected in a jump in gold prices, helping the euro to rise against the dollar even as credit and economic concerns weighed on the single currency. Gold briefly extended gains in Asia, rising more than 3 percent after posting a record one-day gain in absolute dollar terms the previous day with investors fleeing to safety as they watched global equities prices plunge.