Forex - Dollar higher against euro, sterling amid fears US recession will spread

(AFX UK Focus) 2008-01-21 23:33 GMT:

SYDNEY (Thomson Financial) - The US dollar extended gains against the euro and sterling but fell further against the yen midway through the morning session in Sydney on Tuesday after European shares plunged on US recession fears, prompting investors to reverse their positions in the euro and move into safe-haven currencies such as the yen and Swiss franc.

All the major markets in Europe lost between 5 and 7 percent overnight as Euro group president Jean-Claude Juncker conceded a US recession can no longer be ruled out.

With US markets closed for the Martin Luther King public holiday, investors used the precipitous decline of Asian markets to guide them.

The sell-off in European shares is bad news for the euro, which could come under further pressure if the turmoil in financial and credit markets continues, said John Noonan, an analyst at Thomson IFR.

"US and Japanese investors have been sending their money in the direction of the Eurozone for nearly two years looking for better returns. European equity markets have been popular with US investors in particular. If the market turmoil continues and US and Japanese investors accelerate their repatriation efforts the euro can fall steeply against the US dollar and yen," Noonan said.

At 9.50 am (2250 GMT), the US dollar was buying 105.73 yen after slumping to 106.01 yen in late London trade. The euro was down at 1.4442 US dollars after sinking to 1.4446 US dollars overnight and the sterling was doing 1.9424 US dollars after falling to 1.9432 US dollars.

Elsewhere, the Australian dollar was doing 85.98 US cents after skidding to 86.25 US cents as fears of a US recession spreading to the rest of the world led to the Aussie falling against all Group of 10 currencies.

"Sliding equity markets around the world are indications that investors are starting to factor much greater global fallout from a US recession. This backdrop will see the Australian dollar continuing to struggle," said John Kyriakopoulos, head of currency strategy at NAB Capital.

Sydney at 9.50 am (2250 GMT)