Dollar rises in flight to safety from Dubai debt storm
Posted: 28 November 2009 0612 hrs

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NEW YORK - The dollar gained against most other major currencies Friday as investors sought safety amid fears that Dubai may default on its debt.

"The markets have been riddled by a fresh round of panic, with the reaction even more aggressive than what we have recently seen, as a combination of the lightened post-US holiday trade and news that Dubai is seeking a six-month standstill on its debt, weigh on sentiment," said Joel Kruger of Forex Capital Markets.

The euro fell to 1.4959 dollars at 1900 GMT, compared with 1.5019 dollars late Thursday.

The dollar edged up to 86.72 yen from 86.59 yen.

During Asian trading, the dollar tumbled to 84.82 yen, the lowest level since July 1995, before recovering.

The market reacted to the Dubai government's announcement late Wednesday that it was seeking a six-month moratorium for the Middle Eastern city state's flagship conglomerate Dubai World on 59 billion dollars in debts.

US financial markets wrapped up early after being closed Thursday for the Thanksgiving Day holiday.

"The overriding fear is that this would turn into an Argentina-style debt default or a repeat of volatility of Q4 (fourth quarter) 2008," when the collapse of Lehman Brothers unleashed a global financial firestorm, said Kathy Lien of Global Futures and Forex.

"A major exogenous risk like the Dubai news is one of the few things that can trigger a bottom in the US dollar as the greenback's safe-haven status overrides US fundamentals," she said.

The dollar and the yen are generally considered safer investments in times of economic and political uncertainty.

"The market is taking a breather. Volatility had soared in early hours after the risk trade headed for the exits in thinned liquidity," said analyst Jane Foley at online trading group Forex.com.

She added: "It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested."

"For the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course."

The yen's earlier surge against the dollar added pressure on Japanese authorities to intervene in markets, a move unseen since 2004, because the stronger yen hurts exports of Japanese companies.

Breaking from his recent cautious remarks on currency movements, Finance Minister Hirohisa Fujii acknowledged that the yen's rapid rise was "harmful" to the economy.

"We will take appropriate action toward disorderly movements," he told reporters on Friday, adding that he would discuss foreign exchange with Europe and the United States "when needed."

In New York trading at 1900 GMT, the dollar rose to 1.0061 Swiss francs from 1.0028 Thursday.

The pound slipped to 1.6478 dollars from 1.6532.

- AFP /ls