Dollar surges as global fears rise and Japan tries to beat down yen

The dollar is back to playing the strongman of world currencies -- a bad sign for markets if it continues.

The buck soared Monday against other major and minor currencies as Japan intervened to halt the yen’s surge and as new worries about Europe fueled a classic rush for safety.

Markets also were on edge after securities firm MF Global filed for bankruptcy, a casualty of Europe’s financial crisis.

The DXY index of the dollar’s value against six other major currencies jumped almost 2% to 76.54, its biggest one-day move this year. But the gain just pushed the index back to where it was Oct. 20.

The dollar surged in September as Europe seemed closer to a meltdown and as global recession fears mounted. In October the buck reversed course as stock markets rallied and investors began to feel more comfortable taking risks in other currencies.

On Monday, safety considerations once again trumped everything else. The euro tumbled 2.2% to $1.383 by 1 p.m. PDT as rising Italian bond yields cast fresh doubt on Europe's financial rescue plan.

The dollar’s biggest move was against the yen, which had hit a record high against the greenback Friday, posing an ever-rising threat to Japan’s export economy.

That finally pushed the Japanese government into action Monday, selling yen and buying dollars in the open market. The dollar jumped 3.1%, to 78.18 yen from 75.82 on Friday. But the U.S. currency still is down against the yen year to date. It was at 81.12 yen at the end of 2010.

"We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing," Prime Minister Yoshihiko Noda told parliament.

In the struggling global economy every country prefers a weak currency because everyone wants to export their way back to health.

It’s not a coincidence that U.S. stocks plunged in September as the dollar shot higher. Some of the worst-performing shares in September were those of U.S. exporters such as Boeing and Caterpillar, which potentially have a lot to lose if a rising dollar makes their products more expensive overseas.

On Monday Boeing and Caterpillar helped lead the Dow Jones industrial average’s slide. The Dow fell 276.10 points, or 2.3%, to close at 11,955.01. Boeing fell 3.3% and Caterpillar lost 2.4%.

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Photo: A currency trader in Tokyo on Monday. Credit: Tomohiro Ohsumi / Bloomberg News

Stocks slump as rising Italian yields cast doubt on Europe rescue

Another jump in yields on Italian government bond is raising fresh doubts about Europe's latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down about 165 points, or 1.4%, to 12,064 at 11:40 a.m. PDT, after surging 3.6% last week.    

Most European stock markets fell 2% to 4% on Monday after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose Monday to 6.09%, the highest level since early August, up from 6.02% on Friday. The yield on two-year Italian bonds surged to 4.99%, up from 4.75% on Friday and the highest rate since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, a key to the strategy was halting the "contagion" before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts, the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it.

The fund is expected to eventually guarantee bonds issued by deeply indebted countries, particularly Italy. The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work — or they believe the Europeans will drag their feet implementing it. Although the broad framework of the rescue was announced Thursday, many of the details were still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of carmaker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership of the euro are all at risk," he said.

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Photo: Italian Prime Minister Silvio Berlusconi. Credit: Remo Casilli / Reuters

Stocks slump as Italian bond yields rise, casting doubt on Europe rescue

Another jump in Italian government bond yields is raising fresh doubts about Europe’s latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down 140 points, or 1.1%, to 12,091 at about 11 a.m. PDT, after surging 3.6% last week.

Most European stock markets were down between 2% and 4% after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose to 6.09% Monday, up from 6.02% on Friday and the highest since early August. Two-year Italian bond yields surged to 4.99% from 4.75% on Friday and the highest since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, key to the strategy was halting the “contagion” before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund -- known as the European Financial Stability Facility -- to $1.4 trillion by leveraging it.

The fund is expected to eventually issue guarantees on bonds issued by deeply indebted countries, particularly Italy. The goal: bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work -- or they believe the Europeans will drag their feet on implementing it. Although the broad framework of the rescue was announced on Thursday, many of the details were still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of sports car maker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein-in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership of the euro are all at risk,” he said.

-- Tom Petruno

Photo: Italian Prime Minister Silvio Berlusconi. Credit: Remo Casilli / Reuters

 

Asian stocks, euro rise on European rescue plan

Asian stock markets and the euro currency rallied on Thursday on word of Europe’s new plan to contain its two-year-old government debt crisis.

Share prices were up across the Asia-Pacific region at midday, with Japan’s Nikkei-225 index up 1.4%, the South Korean market up 1.2% and Australian shares up 2.3%.

The euro currency rose 0.5% to $1.398 from $1.391 on Wednesday. The euro has rebounded from its recent low of $1.318 on Oct. 3.

Yields rose on U.S. Treasury bonds trading in Asia, a sign that some investors were moving out of the classic haven of American government debt. The 10-year T-note yield edged up to 2.23% from 2.21% on Wednesday.

The plan to boost the firepower of Europe's rescue fund for struggling member states to an estimated $1.4 trillion "might just finally convince the skeptical markets that this time the backstop against contagion is for real," said Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi.

European authorities will be bracing to see how the continent’s bond and stock markets react when trading opens at midnight PDT.

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Chinese inflation remains high amid signs of economic slowdown

Inflation in China moderated in September for the second consecutive month, but still remained stubbornly high amid growing signs of a global slowdown.

China’s consumer price index, the main gauge of inflation, grew 6.1% from a year earlier, down slightly from a 6.2% rise in August.

The index remains far above the 4% annual target set by the central government, making it difficult to loosen monetary policy if China’s economy is pulled into a global decline.

There’s evidence that the world’s second-largest economy may be slowing down.

Trade data released Thursday showed Chinese exports decreased in September over slackening European demand and a strengthening yuan, the country’s currency.

Prices for crude oil and copper fell on news of the data, reflecting jitteriness in China’s ability to import commodities as voraciously as it has in the past.

Meanwhile, thousands of small businesses in China’s coastal provinces are reportedly being squeezed by the country’s credit crunch. China’s State Council said it would support the small firms by increasing loans and offering tax breaks.

But central leaders say reining in inflation remains an overall priority –- dulling expectations that policymakers will loosen credit, drop interest rates or lift buying restrictions in China’s stagnant residential property market.

“For the moment, we remain in policy stasis -– no more tightening, but no real loosening -– while Chinese authorities nervously eye developments in the Eurozone,” said Alistair Thornton, an analyst for IHS Global Insight in Beijing. “It is the Eurozone and U.S. that form the greatest downside risk for China’s outlook.”

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Photo: Customers look at prices for vegetables at a supermarket in Hefei, China. Credit: Reuters

China calls on U.S. to oppose currency legislation

China warned the U.S. against trade protectionism hours after the Senate passed a proposed bill that would slap tariffs on Chinese goods over its perceived under-valued currency.

In a written statement posted on its website, China's Foreign Ministry urged Washington to oppose the bill.

“This proposed bill in the name of so-called ‘exchange rate misalignment’ is protectionism and a serious violation of World Trade Organization rules,” Ma Zhaoxu, a foreign ministry spokesperson, said in the statement. “This won’t solve America’s own economic and employment problems.”

China's central bank also issued a statement Wednesday defending the value of the country's currency, known as the yuan or renmenbi.

“The American Senate has repeatedly ignored the facts, has constantly pestered [China] on the renminbi exchange issue in order to find an external excuse for its own malaise,” the statement said.

The legislation, which could penalize any country found to be holding the value of its currency down to create an unfair trade advantage, is largely targeted at China, which is believed to under-value its yuan by upwards of 25%.

The bill would still need to pass the House where it faces stiff opposition from Republican leaders wary of a trade war and harm to U.S. business interests in China. The Obama administration has not demonstrated support of the legislation either.

The American Chamber of Commerce in China also urged lawmakers to oppose the legislation, saying the U.S. would benefit more by pressuring Beijing to open its domestic market to American firms.

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China lashes out against U.S. bill aimed at currency manipulators

China on Tuesday blasted a proposed U.S. bill that would punish countries for undervaluing their currency by saying it would undermine the global economy and potentially lead to a trade war.

China’s central bank and ministries of commerce and foreign affairs released separate statements criticizing the bill, which is being championed by Democratic lawmakers who hope to protect U.S. jobs by slapping tariffs on Chinese imports.

Such a move “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties,” said Foreign Ministry spokesman Ma Zhaoxu in a statement posted on the Chinese government’s official website.

China’s central bank said the attention given to China’s currency, known as the yuan or renmenbi, deflects Washington from the real issues plaguing the American economy.

“The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see,” the bank said on its website, according to a translation by Reuters.

The yuan’s value is set daily by China’s central bank, not by free markets. Critics of China’s currency policy contend the yuan is undervalued by as much as 40% to give the world’s second largest economy an unfair trade advantage.

Labor advocacy groups in the U.S. such as the Economic Policy Institute say this has fueled a trade deficit with China that has cost Americans 2.8 million jobs between 2001 and 2010.

Debate still rages over whether targeting China’s currency will return jobs to the U.S. as manufacturing could shift to another low wage country such as Vietnam.

The yuan has edged-up about 10% against the dollar since it was de-pegged from the greenback in June, 2010. Experts say the central bank is in favor of faster appreciation to combat inflation, which is running at a three-year high. A stronger yuan would make imports cheaper.

But the Ministry of Commerce, which oversees trade, and officials in coastal manufacturing provinces are against more aggressive appreciation for fear it will bankrupt factories, sap taxes and leave millions out of work.

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Photo: China blasted a proposed U.S. bill that would slap tariffs on countries that undervalued their currency. Above, a bank clerk counts notes. Credit: Zhong Min / EPA

U.S. dollar is a weakling no more

Remember all that talk about how the Federal Reserve was killing the dollar by printing too many of them?

Suddenly, the Fed is the buck’s BFF.

The dollar has been roaring against many other major and minor currencies over the last month, a trend that accelerated this week as global investors were spooked yet again by recession fears.

For now, the dollar is back in its traditional role as a haven in times of market and economic turmoil. And the Fed helped by opting not to launch a new money-printing campaign when policymakers met on Wednesday.

Instead, the Fed said it would try to pull longer-term interest rates lower by shifting its massive Treasury bond portfolio from shorter-term securities to longer-term ones.

At the same time, the Fed warned of “significant downside risks to the economic outlook.” That was enough to trigger another rush of global money into the greenback.

The DXY index (charted at left), which measures the dollar’s value against six other major currencies, soared 1.4% on Thursday to its highest level since February. The index has risen 6.3% since Aug. 29.

The euro has dropped 7.2% vs. the dollar since Aug. 29, to $1.346 on Thursday, the lowest since January.

The buck’s gains against some currencies have been far more dramatic. Compared with three weeks ago, one dollar now buys 11% more South Korean won, 13% more Mexican pesos and 20% more Brazilian reals. It buys 26% more Swiss francs than six weeks ago.

With the Fed’s meeting out of the way, “The market is no longer worrried that [policymakers] will undercut the nascent dollar recovery anytime soon,” Alan Ruskin, currency strategist at Deutsche Bank Securities, said in a report Thursday.

Meanwhile, the outlook for the euro gets bleaker, he said, amid expectations that the European Central Bank will have to continue pumping new money into the continent’s deeply troubled financial system.

Who loves a stronger dollar? Any American business or leisure traveler heading overseas, of course.

But the dollar’s resurgence is bad news for U.S. exporters because it has the potential to make their products more expensive for foreign buyers. That’s another jab to the stock market’s gut this week as shares of multinationals such as Caterpillar, Boeing and Colgate-Palmolive get clobbered.

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Chinese currency quickening pace of appreciation

The change may seem minuscule. But for those who follow China's currency, 0.8% is practically a bonanza.

That's how much the Chinese yuan has appreciated against the dollar in the last week, its fastest pace in almost a year.

Monday showed no signs of slowing down as China's central bank set its so-called parity exchange rate at 6.395 yuan for each dollar, giving the Chinese currency a value of 15.64 U.S. cents, a record high. (The bank sets the rate in the morning before every currency trading session and allows the yuan to strengthen or weaken 0.5%.)

The yuan has gained 3.1% against the greenback this year and 6.8% since June 2010, when China depegged its currency from the dollar. Many analysts had expected the yuan to climb just over 6% for the year, but the last few days may give them reason to revise on the upside.

The uptick in appreciation is welcome news to trading partners who have long argued that China unfairly undervalues its currency to boost its exports. Reinforcing that view, China last week reported its largest trade surplus in more than two years.

Diplomacy may be at play as well. The yuan's strengthening comes right before Vice President Joe Biden's arrival in China this week. The last time the so-called redback grew this fast was last September, when Washington was preparing a report on China's currency regime.

But more than anything, analysts say, the strengthening yuan has to do with China's growing battle with inflation, which hit a 37-month high in July, stoking fears of social instability the cost of food.

A mightier yuan would make imports cheaper and rein in the nation's over-abundant money supply.

The recent downgrade of U.S. government debt by Standard & Poor's has also raised doubts in Beijing about the merits of running large trade surpluses, which increase China's foreign-currency reserves. With few other viable ways to invest that money, China has accumulated about $1.2 trillion in U.S. Treasuries.

In a recent research note, Daniel Hui, a senior foreign exchange strategist at HSBC, said of the yuan's quickening appreciation:

[I]t is increasingly likely that this is going beyond just macro factors, and that domestic politics is becoming increasingly important.

We have long viewed [foreign exchange] policy as ultimately being the outcome of a domestic political process. Now, the U.S. sovereign downgrade by S&P as well as the seemingly increased potential for a third round of quantitative easing is stoking real debate [in China] as to the broader costs and benefits of China's choice of exchange rate policy. This, alongside recent domestic discontent, may have been enough to shift [foreign exchange] policy away from the previous stance, becoming more permissive and lessening the requirement for such large accumulation of dollars. If so, this new, accelerated pace of appreciation could last for some time.

The trend could also mean that China's central bank, which favors liberalizing the country's financial sector, is gaining ground against pro-export forces -- namely rich coastal provinces and their patron in the central government, the Ministry of Commerce.

The ministry has said that a sharp appreciation of the yuan would leave millions of factory workers out of jobs. 

But Li Jie, head of the Reserves Research Institute at the Central University of Finance and Economics in Beijing, disagrees, telling The Times last week that a stronger yuan would help the country's manufacturers by reducing raw-material prices and wages.

"It would easily offset the pain of having more expensive exports," Li said.

-- David Pierson

Photo: A grocery store cashier holds 100-yuan notes in Beijing. Credit: Frederic J. Brown / AFP / Getty Images

 

 

 

 

 

Dollar tumbles as Fed sees long stretch for low interest rates

The dollar was the victim Tuesday as the Federal Reserve said it may hold short-term interest rates near zero for another two years.

The prospect of rock-bottom rates continuing through at least mid-2013 drove the dollar down sharply against other major and minor currencies.

The euro surged to $1.437 from $1.418 on Monday. The dollar slumped to 76.96 yen, down from 77.77 on Monday and nearing the recent record low of 76.76 reached on July 29.

The DXY index (charted at left), which measures the dollar’s value against six other major currencies, fell 1.2% to 73.91. It's still above the 2011 low of 72.93 reached on April 29.

The Swiss franc, which has become one of the world’s favorite havens amid the latest market turmoil, was a huge winner as the dollar wilted. The buck’s value fell to a record low 0.721 francs, down 4.5% from 0.755 francs on Monday.

The Australian and Canadian dollars also rose sharply against their U.S. counterpart.

Foreign investors looking for a place to park cash may find the U.S. less appealing if short-term interest rates stay low compared with other countries. That would lead to weaker demand for dollars.

A falling greenback saps Americans’ purchasing power abroad. But it’s a potential boon to U.S. exporters by making their products less expensive for foreign buyers.

-- Tom Petruno

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Gold surges past $1,670 toward new record amid economic worries

Gold prices are surging along with concerns about the state of the global economy, rushing to a high of $1,675.90 an ounce in New York on Wednesday, up from $1,641.90 on Tuesday.

Investors, spooked by a raft of discouraging reports about slowing job growth, have been pulling out of stocks and retreating into the safety of the precious metal.

Even as the government cobbled together a deal on the debt ceiling, Wall Street was stumbling. The turbulence has helped gold continue its decade-long upward march.

The country's credit rating could still take a hit down the line, threatening the value of the dollar, said Marin Aleksov, chief executive of precious metals broker Rosland Capital in Santa Monica. But the potential for more borrowing does the same, he said.

"The economy's stalling, you have the possibility of a downgrade and a debt deal that's just not enough in the long term," he said. "If you don't trust currency, you don't trust the markets and you don't trust your leaders, where else can you go but gold?"

Prices hit a then-record high of $1,641.90 an ounce Tuesday amid news that the Bank of Korea bought its first batch of gold in more than a dozen years. Analysts said they expect more central banks looking to limit their exposure to a weakening dollar to follow suit.

By the end of the year, the price could meet -– or exceed -- $1,800, they said.

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Asian stocks rally, gold falls as Congress sets debt deal

Stocks jumped in Asia as the new trading week began after Democrats and Republicans reached a deal to raise the U.S. debt ceiling and cut spending.

Gold fell and Treasury bond yields edged up. The dollar was mixed.

The Tokyo stock market’s Nikkei-225 index was up 180 points, or 1.8%, to 10,012 about two hours into the trading day Monday. Australia's main share index was up 1.9%, the South Korean market gained 1.7% and Hong Kong was up 1.5%.

Stocks had been pounded worldwide last week in part on fears that the U.S. might default on its debts. On Wall Street the Dow Jones industrial average fell 4.2% for the week, its worst loss in a year.

Resolving the debt crisis would remove one stumbling block for markets. Now, investors are expected to shift their focus back to the global economy, which has weakened substantially in recent months.

But for the moment, at least, investors are pulling back from some of the classic havens that attracted money as Washington’s debt drama worsened.

Gold futures fell $13 to $1,615 an ounce in electronic trading Sunday evening, after reaching a record high of $1,628.30 on Friday in New York.

The yield on the 10-year Treasury note rose to 2.83% from 2.80% on Friday.

Despite worries about possible default -- something that was never a serious risk in the eyes of many analysts -- Treasury yields had plunged on Friday after the government gave a dismally weak estimate of second-quarter economic growth.

That showed that, even as Congress’ gridlock over the debt ceiling put the world on edge, Treasuries were retaining their role as a place for capital to hide in times of economic uncertainty.

-- Tom Petruno

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