THE DOLLAR plummeted to a record low and the price of gold touched $1,000 (€640) yesterday as retail sales figures confirmed that the US is in recession and concern intensified about spreading distress in the hedge fund sector.
The US currency tumbled, breaking through Y100 to the dollar for the first time since 1995. The dollar fell to Y99.77 before recovering to stand down 0.8 per cent at Y100.70 by midday in New York.
The euro moved to fresh record highs above $1.56 before easing slightly.
As the euro rose in value, Goldman Sachs estimated that the euro zone had overtaken the US as the world's biggest economy measured in terms of market exchange rates.
Spot gold traded above $1,000 a troy ounce for the first time, while West Texas Intermediate crude oil hit $111 a barrel before dropping back.
The trades above $1,000 an ounce in the spot bullion market in London were confirmed by several banks, although the actual level was the subject of controversy as it was not reflected on several trading systems.
Asian stock markets fell heavily, with the Nikkei down 3.3 per cent to a two-year low and the Hong Kong Hang Seng index down 4.8 per cent.
In London, the FTSE100 fell 1.45 per cent to 5692.4.
However, there was some respite in New York after Standard & Poor's predicted that the majority of losses on US subprime asset-backed securities have already been disclosed. The credit rating agency said that it now expected writedowns related to subprime to reach $285 billion.
Investors initially fled back to the safety of government bonds, pushing down yields, though the flight to safety eased in early afternoon US trading as US stocks clawed back initial losses.
By mid-afternoon, the S&P500 was up 0.75 per cent.
Analysts said that the market moves were being driven by two big themes: intensifying dollar weakness and forced sales by hedge funds under pressure from their bank lenders to reduce their portfolios.
"The feeling across fixed income trading floors is that the bottom is dropping out of markets," said TJ Marta, strategist at RBC Capital Markets.
"The Fed can cushion the blow, but the market's faith that they can provide a silver bullet is misplaced."
Meanwhile, shares in Bear Stearns continued their sharp decline, dropping 7 per cent in afternoon trade as investors worried about the investment bank's exposure to Carlyle Capital - which this week said that it had debt in excess of $1 billion - and to other troubled funds.
Yesterday, US treasury secretary Hank Paulson called on financial institutions to raise new equity and reduce their dividends as he presented new regulatory proposals.
Meanwhile, senior Democrats in Congress put forward a rescue plan to offer $300 billion in loan guarantees for new mortgages.
Analysts said that the weakness of the dollar, expectations of further Fed rate cuts and additional injections of liquidity were fuelling commodity prices.
The markets are simultaneously grappling with mounting signs of forced sales by hedge funds driven to reduce their portfolios by lenders trying to reduce their own risk exposures.
"The credit crunch - with a long lag - has now reached the hedge fund industry," said David Rosenberg, chief US economist at Merrill Lynch.
Mohammed El-Erian, co-chief executive of Pimco, said: "Today's price action points to a growing number of hedge funds having to go into survival mode." - (Financial Times Service)
