Dollar up, oil down after news bin Laden killed

Investors warn that this kind of reaction to major news is often only temporary - interest rates, not geopolitical events, are the overriding driver.

May 2, 2011 14:06
2 minute read.
New York stock exchange

NY Stock Exchange 311. (photo credit: REUTERS)


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LONDON - The killing of al Qaida leader Osama bin Laden by US forces prompted investors on Monday to strip some of the risk premium underpinning world asset prices, lifting the dollar, boosting stocks and weakening commodities.

Oil, gold and silver prices all fell as reaction to the death of the West's most wanted man swept across thinly traded financial markets.

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But investors warned that this kind of reaction to major news is often only temporary.

"Markets across the globe received a bit of a boost ... as news broke that US forces had killed Osama bin Laden. However, like many euphoric bounces, they are often short-lived, especially given the possibility for reprisal attacks from extremists," said Ben Potter, market strategist at IG Index.

There were holidays in many countries -- including China, Hong Kong, Singapore, Thailand and Britain -- so trading was limited.

Nonetheless, the initial reaction was a boost for US assets and a modest fillip for equities.

The dollar rebounded from a three-year low against a basket of currencies, where it had languished as a result of perceptions that the US Federal Reserve is in no hurry to tighten monetary policy.

The dollar was up a quarter of a percent, off its daily highs. The announcement of bin Laden's death triggered short-covering demand for the dollar after the dollar index had hit its weakest since mid-2008.

Longer term, however, analysts said the news would have only a limited impact on the dollar because interest rates, not geopolitical events, are the overriding driver.

"Risk as a driver of the FX market has been much less than it has been ... The main trend is relative dollar weakness due to monetary policy," said Kasper Kirkegaard, currency strategist at Danske Bank in Copenhagen.

Dollar-sensitive oil and gold fell, dipping by as much as two percent at some point. U.S. crude was down close to 1.6 percent, earlier hitting a session low of $112.01, retreating from a 31-month peak of $114.18 set on Friday.

Silver tumbled 10 percent, its steepest fall since late 2008, hit by the dollar, increased margins for futures trading and a technical overhang after a 170 percent rally over the last 12 months to a record high last week.

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