Dollar in free-fall as foreign investors ditch Australian assets

Dollar in free-fall as foreign investors ditch Australian assets
CLANCY YEATES
May 20, 2010

The biggest market correction since late 2008 has deepened, as skittish investors ditch Australian assets amid fears Europe's debt crisis will derail the global recovery.

Worries of another leg in the financial crisis worsened yesterday, prompting a 1.9 per cent sell-off on the local sharemarket and a free-fall in the Australian dollar.

Overseas hedge funds frantically entered deals to ''sell Australia'', broking houses said, sending the dollar tumbling more than US2c to a fresh eight-month low of US85.88c.

The carnage continued into early European trade, with the region's markets down about 3 per cent.

The market turmoil followed a surprise move by Germany to institute a ban on short-selling of its banks, echoing the attempts of regulators to shore up confidence at the height of the financial crisis.

In response to the escalating problems in Europe, markets are turning their back on assets seen as carrying high exposure to the world economy.

The Australian dollar and local shares are high on the list, as markets view both as proxies for the global growth outlook.

The currency strategist at RBS, Greg Gibbs, said Germany's need to shore up the system was ''shocking'' to investors because it suggested European governments held doubts over whether last week's $1.1 trillion bailout was enough.

''It is either a massive over-reaction or the risks of a collapse in the euro system are larger than we thought,'' Mr Gibbs said.

Since breaching 5000 points last month, the ASX 200 has tumbled more than 12 per cent to 4387.1 points.

The rate paid by global banks on three-month loans - the London interbank offered rate, or Libor - has also surged to a nine-month high.

''The only reason it's gone up is because banks are a bit worried about lending to each other for terms of longer than a day,'' Mr Gibbs said.

According to research from the Melbourne Institute, shareholder sentiment has taken its biggest slide since the heat of the financial crisis, after a 10.5 per cent year-on-year slide in confidence in May. The reading was the first decline after five rises in a row.

Despite the worsening outlook, analysts remain upbeat on Australia's economic outlook.

A strategist at Credit Suisse, Atul Lele, said the prospects of the global economy had actually improved in recent weeks, shown by stronger growth in the United States.

Because of this, Mr Lele said he thought sharemarket valuations now looked attractive, especially in sectors exposed to global growth such as resources.

He added that regulation should not spook investors because increased government involvement - including short-selling bans - had been more help than hindrance in the recent market recovery. ''We've seen a significant amount of intervention globally in the past 18 months and that has been been largely positive, and it explains how we got out of the financial crisis with such rapidity,'' Mr Lele said.

The chief executive of David Jones, Mark McInnes, said the economy was ''very hard to predict'' on a weekly or monthly basis, but emphasised the string of upbeat forecasts from the Reserve Bank and the recent federal budget.

''If you compare [now] to March last year [when the] the world was ending, BHP had just sacked 3000 people, unemployment was rising, house prices were falling, and the sharemarket was at 2800 points - a year and a few months on, the fundamental economy is much, much better.''

http://www.smh.com.au/business/dollar-in-freefall-as-foreign-investors-ditch-australian-assets-20100519-vfcq.html