Dollar firms as Obama takes office

January 21, 2009 06:27:08 AM

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The dollar firmed on Tuesday as markets hoped new US President Barack Obama will prove equal to the challenges facing the global economy while the pound tumbled, hit by mounting concerns over the British outlook.

The pound hit a seven-year low against the dollar and a record trough versus the yen as players noted how another massive bank bailout programme announced Monday only saw bank shares collapse on the stock market.

Dealers said investors clearly believed that the latest package will not do the job of restoring confidence in the banks which will eventually have to be fully nationalised by the government.

In late Tuesday trade, the euro was quoted at 1.2911 dollars, down from 1.3062 dollars late Monday.

The dollar fell to 90.14 yen from 90.53 yen.

The pound slumped to 1.3926 dollars from 1.4388 dollars.

Commerzbank analysts said the euro could slip further, with the unit under pressure after concerns about the state of some member countries' public finances were highlighted by the Standard and Poor's Spain and Greece downgrades.

Dealers said the pound was in the spotlight, falling very sharply on concerns about the health of the British financial system and government efforts to get credit flowing again.

"The pound has plunged from an intra-day high of 1.4909 dollar yesterday ... as market participants consider the prospect of full nationalisation of certainly one and probably more of the major UK financial institutions," said Derek Halpenny of Bank of Tokyo-Mitsubishi.

"There's nothing like a good bank panic to put the skids under sterling," said Piers Cracknell, commercial director at currency specialists Moneycorp in London.

As fears about the banks grow, the traditional safehaven currencys -- the dollar, Swiss franc and yen -- will likely find support, dealers said.

Dealer said against this background, there were huge hopes that President Obama will be able to get the US economy back on track.

In London trade, the euro changed hands at 1.2911 dollars against 1.3062 dollars late on Monday, at 116.43 yen (118.27), 0.9272 pounds (0.9078) and 1.4781 Swiss francs (1.4818).

The dollar stood at 90.14 yen (90.53) and 1.1454 Swiss francs (1.1343).

The pound was at 1.3926 dollars (1.4388).

On the London Bullion Market, the price of gold rose to 853.25 dollars an ounce from 838.05 dollars late on Monday.