Dollar plunges to fresh euro low

Dollar plunges to fresh euro low
The US dollar fell to a new low against the euro after the latest piece of US economic data.
Labour department figures showed the number of people seeking unemployment benefit had leapt by the largest amount since February.
The data boosted expectations that US interest rates could be cut further before the end of the year.
The euro hit a high of $1.4305 on Thursday, before settling at 1.4293 in late US trade.
It broke the previous record, set on 1 October, when one euro bought $1.4282.
Expectation that the US will lower borrowing costs - while intended to boost the economy - can also make the currency less attractive.
The move can act as a brake on investments in the dollar, as investors seek to place their money where deposits can lead to better returns.


Export implications


The labour department figures, which showed an extra 28,000 claims for benefit, came a day after data showing the construction of new homes and apartments in the US had plunged to a 14-year low in September.
The dollar has been sliding since the Federal Reserve cut rates from 5.25% to 4.75% in September to help rejuvenate confidence in the world's largest economy.
This followed a summer of turmoil in the world's credit markets, sparked by record loan defaults in the US sub-prime mortgage sector.
Since then, a raft of mostly disappointing economic news and soft inflation figures has prompted anticipation of further rate cuts.
While analysts expect the US Federal Reserve to cut interest rates, the European Central Bank is tipped to raise rates within coming months.
There are fears in Europe that a strong euro relative to the dollar could harm exports to the US and China.

How to lose

How to lose half a billion

Allied Irish Bank's admission that it has lost more than £500m on the foreign exchange markets thanks to a trader who has since absconded sounds impossible to believe.
Except, of course, that it happened in 1995, when Nick Leeson brought down Barings Bank, after losing at least £800m in the derivatives market

No-one is suggesting that AIB is going under. AIB is a retail bank with deep pockets, while Barings was badly undercapitalised.

But still the implications are serious.
The complexity of the trading - and the memory of how Nick Leeson broke Barings - means that oversight systems should have been much more robust, market watchers say.
"This isn't going to hurt AIB as badly as Barings in financial terms," one London trader told BBC News Online.
"But after Leeson people are expected to have much tighter systems in place. Their internal controls, the auditors, even the regulators are looking very, very bad over this.

"And there could be others like this. The big investment banks have really tight procedures, but the more staid mid-tier outfits have never been looked at as closely.
"There could well be other skeletons in the cupboard."
Missing, believed lost
Still, to the layman the idea of a bank "discovering" that it has lost half a billion pounds in buying and selling foreign currency sounds like lunacy.
But the hole Allied Irish Banks has discovered in its accounts pales beside the sheer magnitude of foreign exchange trading worldwide.

Trillions of dollars pass daily through the forex markets, as they are known - the same money, churning from one currency to another minute by minute.
Traders look for fluctuations in exchange rates, and take advantages of situations where a rate looks promising compared with where they think it is likely to move in the future.
On the face of it, that is not too complicated a proposition.
But bets can go wrong, so traders cover their backs by hedging: using options, bets with another institution that will pay out if a currency falls or rises a certain amount by a certain date.
The theory is that the options will offset losses should a guess go wrong. If it goes right, then the option does not have to be cashed in, and the only cost is the commission for taking out what amounts to insurance in the first place.

Cooking the books

It is this part of the forex business which is hurting AIB.
Early indications are that its trader ran up huge losses by backing - metaphorically speaking - the wrong horse with what AIB chief executive Michael Buckley has called "a very, very large number of trades".

Traders are meant to follow strict rules on allowable risk, given the huge sums that can be lost.
But this man did not get authorisation for his bets, and so he tried to cover his tracks. He created imaginary options deals in the firm's books, deals which never took place.
A cursory glance would have made it seem that the books balanced, that the losses were being matched by profits on options elsewhere which were the mirror image of the failed trades.
Somehow, the "back office" - the part of a trading operation which checks what the front-line traders are doing and looks after the book-keeping - overlooked it.
AIB believes that could well be the result of an internal conspiracy.
As any unlucky gambler knows, once you fall deep into the red the bets needed to get back out again soon spiral out of control.

War talk sends

The euro on Monday reached a near four-year high against the US dollar on continuing fears over a war on Iraq and the global economic outlook.
The euro reached $1.0907 at one point, a level not seen since March 1999, before edging back to $1.0836 at 1700 GMT.

"It's a matter of a concern for us if the fall in the value of the dollar is too rapid," Germany's central bank president and European Central Bank board member Ernst Welteke said.
Continuing weakness of the dollar could make exports from the eurozone, where the leading economies of Germany and France are struggling, uncompetitive on the global markets.
The sell-off of the dollar also sent the UK pound to a new three-year high against the greenback, while the safe-haven Swiss franc maintained a four-year high.
Anti-dollar feeling

Sterling rose as high as $1.6377 in early European trade, its highest since January 2000.
"Last week's close above $1.0700 has forced us to adjust our view," said Nicole Elliott of Mizuho Corporate Bank.

"It suggests we have underestimated bullish momentum and the gathering anti-dollar feeling."
The fresh dollar weakness came as world stock markets tumbled and UN arms inspectors delivered an update on their work in Iraq to the Security Council.

Some market experts discounted the arms inspectors' report as a driver of the forex market.
Said Robert Sinche, currency strategist at Citibank: "Has Iraq proven that it has disarmed? No. Is there proof that it is holding weapons of mass destruction? No.
"So the forex market is saying there is no clear conclusion to support one view or the other, and it will continue to take direction from other markets."

Zimbabwe axes forex petrol outlet

Zimbabwe has stopped motorists buying petrol in foreign currencies, a system introduced six months ago.
Reserve Bank Governor Gideon Gono told state media that its abuse had led to high black market prices.
Zimbabwe is facing an economic crisis with a chronic shortage of fuel and basic food stuffs.

Meanwhile, a government minister has warned financial institutions against lending to white farmers in case they are farming "illegally".
Some 4,000 white farmers have been evicted from their land since a controversial land reform programme began in 2000.
Land has been redistributed to some 150,000 black farmers but agricultural production has halved.

Apology

Mr Gono said the foreign currency coupon system, where certain garages accepted payment in foreign currency had initially worked well, but it had only ever been intended as a temporary measure, to reduce queues.

"Some members of the public started to abuse the facility and used it for speculative and parallel market activities, thus militating against its main objective," he told the Sunday Mail newspaper.
He said he regretted any inconvenience, but it was being scrapped "for the best interest of the wider economy".

In the same paper, Land Reform Minister Didymus Mutasa accused Mr Gono's Reserve Bank and unspecified financial institutions of getting into contract farming with white farmers without checking their status on the farms with his ministry.
He said before any loan can be extended to a white farmer, his ministry needed to be consulted.

Mr Mutasa claims new black farmers are being sidelined on the grounds that they do not have collateral support, while white farmers are perceived to have the capacity to repay as they have title deeds.
President Robert Mugabe has always accused western countries led by former colonial power Britain of sabotaging the economy because of opposition to land reform.

ICAP probes suspected forex fraud

British brokerage ICAP has hired lawyers to probe currency fraud allegedly carried out by three of its New York-based employees.
The three ICAP staff are among 47 currency traders arrested in a high-profile swoop by the FBI last week.

ICAP said the trio had not traded on the firm's behalf, and added that its own finances appeared unaffected.
"I believe this to be just an isolated incident of three individuals," said ICAP chief executive Michael Spencer.
"I hope that the issue is resolved rapidly."
The lawyers hired by ICAP, an interdealer broker, are to investigate the full extent of the employees' alleged activity.
Arrests
The 47 currency traders detained in the FBI raid were later charged with a range of criminal offences, including fraud.
They include bank staff accused of taking kickbacks to rig transactions so that their employers would lose money, and "boiler room" operators who allegedly sold worthless investments to unsuspecting members of the public.

The FBI swoop netted employees of one other UK brokerage - Tullet Libery, a subsidiary of Collins Stewart - as well as staff at big name Wall Street banks including JP Morgan Chase and UBS.
The companies themselves are not under investigation.
ICAP's announcement came as it unveiled a 47% increase in first half pre-tax profits, and said it was confident of further growth in the month ahead.

"Market conditions remain good for ICAP, and our overall position is very strong," Mr Spencer said.
ICAP shares closed up 5p at £13.85.

India's new forex law

India is replacing a controversial foreign exchange law with a more liberal act so as to encourage outside investment.
The old Foreign Exchange Regulation Act (Fera), which has now been revoked, was disliked by traders and businessmen who frequently criticised what they termed its harsh provisions.

Fera came into existence in 1973, and since then many top industrialists and businessmen fell foul of its provisions.
Suspects accused of violating the law were often detained for questioning, and faced the prospect of a prison sentence if they were found guilty.
Deregulation

But under the new Foreign Exchange Management Act (Fema), which comes into force on Thursday, suspected foreign exchange violations are treated as civil rather than criminal offences.
India is attracting more foreign investmentFinancial experts say Fera was devised and implemented when India had a highly regulated economy, and when foreign investment was either not allowed or regarded with much suspicion.

All that changed in 1993, when India liberalised its economy and started to attract a lot more overseas investment.
Since then there has been a substantial increase in India's foreign exchange reserves.
Foreign trade has increased, tariffs have been curtailed and foreign institutions are allowed far greater access to its stock markets.
The new law, experts say, reflects the ongoing desire of the financial authorities to attract more foreign investment and promote exports.
However the authorities have made clear that although Fera is repealed, it still applies to offences committed before its abolition.

There are nearly 7,000 cases pending, some of which are in an advanced stage of investigation.
One of those being investigated for foreign exchange violations is the son of a former Prime Minister, P V Narasimha Rao