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Dollar Gains on Risk Aversion as Kim Jong II Dies

Last updated 12/19/2011 2:54 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The death of Kim Jong II the leader of North Korea, one of the most secretive and repressive societies in the world,  sent regional bourses into tailspin at the start of week’s trade as both South Korea and Japan went into high alert on fears of uncertainty in the transition. Kim Jong Il, who had been treated for "cardiac and cerebrovascular diseases for a long period," suffered a heart attack on Saturday, according to North Korea's official KCNA news agency.

Although Kim’s son Kim Jong Eun is expected to succeed him, policymakers in the region are uncertain if the process will be peaceful and tension free. North Korea is one of the most enigmatic and dictatorial societies in the world whose military ambitions and nuclear tests have many of its neighbors including South Korea and Japan worried over the prospect of instability in the region.

The news sparked a massive sell off in equities during Asian trade with Australian ASX 200 dropping -2%  while the Nikkei was down -1.2%.The dollar rallied against both Korean won and the yen and risk currencies came under selling pressure with EUR/USD dropping through the 1.3000 handle while Aussie tumbled towards .9900.

Risk assets stabilized somewhat in early pre-European trade with EUR/USD recapturing the 1.30 barrier but remain under pressure as investors keep a wary eye on the Korean peninsula. With little economic data on the calendar for the rest of the day, risk FX is likely to be driven by the developing geo-political events and  action in equities. One critical unknown in the whole equation is the reaction of China which has been North Korea’s primary diplomatic ally and main economic sponsor and  which may now take a more active role in its succession plans. Until the succession process and more importantly  North Korea military stance becomes better known any rally in risk FX will be contained.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.