CURRENCIES: Swine-flu Worries Buoy The Dollar And The Yen

by: William L. Watts

The dollar and Japan's yen extended recent gains Tuesday, bid higher as currency investors continued to seek safe havens for their money amid rising worries over the potential for a full-fledged pandemic of the swine flu.

The dollar index (DXY), a measure of the greenback against a trade-weighted basket of currencies, rose to 85.749, up slightly from 85.641 in North American trading late Monday and off of highs seen earlier in Monday's session. For its part, the Mexican peso remained under significant pressure.

The swine-flu virus is suspected in more than 150 deaths in Mexico. "The swine flu outbreak has the globe up in arms, making this very reactionary market even more edgy and vulnerable to event risk," said Jessica Hoversen, currency strategist at MF Global Research in Chicago, in a research brief. "The flu not only raises health concerns but additionally heightens fears about the fragile global economy," she wrote. The number of confirmed and suspected cases of swine flu worldwide increased Tuesday, as the World Health Organization raised its alert level, saying containment of the outbreak wasn't feasible. A pandemic isn't inevitable, but the risk of one has increased, the WHO said. There is no evidence that the outbreak of swine flu has proven fatal outside of Mexico.

The number of confirmed U.S. cases doubled to 40. Worldwide, there were more than 70 confirmed cases, including six in Canada, one in Spain and two in Scotland, according to the Associated Press. Israel on Tuesday confirmed its first case of swine flu, saying tests showed a man who recently returned from Mexico had contracted the virus, the BBC reported.

The usual suspects Amid the anxiety, the yen reasserted its recent role as the most popular haven, gaining ground on the dollar and other major foreign-exchange rivals. The dollar also pushed higher against the other currencies. "Currencies have traded in the usual anti-risk manner, defensive currencies have performed best (Japanese yen) followed by the U.S. dollar," wrote strategists at Bank of Scotland. "It is interesting that the [dollar] has performed so well given the U.S.'s proximity to Mexico," they said.

The dollar traded lately at 95.98 yen, down from 96.90 yen, while the euro fell 0.8% to 124.96 yen. The euro remained under pressure but managed to hold support near the $1.30 level versus the dollar, fetching $1.3017, down slightly from $1.3039 late Monday. The British pound dropped to $1.4546, down 0.4%.

Meanwhile, one dollar bought 14.058 pesos, a loss of 0.9% for the Mexican currency. The euro rose 1.6% to stand at 18.142 pesos. "For Mexico, this is one more in the list of negatives for the economy, including the sharp slowing in U.S. growth, the downsizing of the U.S. auto industry, and concerns over drug-related violence," wrote Douglas Smith, an economist at Standard Chartered Bank, in a note. U.S. banks coming in for fresh scrutiny Jitters over the banking sector are also contributing to investors' aversion to risk, analysts said.

Markets worldwide were affected Tuesday by a Wall Street Journal report that Bank of America (BAC) and Citigroup (C) had been told to raise more capital based on early results of the government's "stress tests" of 19 large U.S. institutions. U.S. stock index futures were pointing to a markedly lower open on Wall Street. Asian equities fell earlier Tuesday, with travel and tourism stocks hit for a second consecutive day on worries about the impact of the flu outbreak on the already suffering industry.

Bank stocks and shares in travel and tourism companies were also under pressure in Europe, sending key equity indexes lower. MF Global's Hoversen said shifts in perceptions about the banking industry, which had tended to drive action in currency markets in recent weeks, could remain overshadowed by headlines surrounding the global flu threat. "The stress tests are still lingering in investors' minds. However given the recent news, the risk appetite that may have been catalyzed by a clean report from the banks may now be damped by the ongoing fears of the virus," she said.