Dollar weak, gold peaks as Fed, BOJ action eyed

Photo: AFP

HONG KONG - The dollar hit an eight-month low, driving gold to a record high, on rising expectations the Federal Reserve will act again to help the struggling economy while new evidence of China's robust health lifted European stocks.

Europe's major equity markets rose on Wednesday, with the pan-European FTSEurofirst 300 index of top shares up 0.6 percent in early trade, making up for Tuesday's decline, spurred by news of a dip in US consumer confidence.

Gold rose as the Fed and Bank of Japan look to pump more funds into markets via bond purchases and other measures to help their struggling economies.

"The backdrop for the dollar continues to deteriorate," JPMorgan said, advising clients to seize any bounce in the dollar as a chance to sell.

"The increased focus on QE and the break of several key dollar support levels maintained the overall bearish bias."

Japanese government bond futures hit a seven-year high while US Treasury yield curve moved on Tuesday to its flattest since early September over expectations of further monetary easing by both central banks.

Such expectations were reinforced by a fall in US consumer confidence to its lowest since February and a worsening outlook in Bank of Japan's quarterly tankan survey of major companies.

Stock markets, however, found support in a rise in HSBC's China Purchasing Managers' index to a five-month high in September, which pointed to renewed, though moderate, momentum in China's vast industrial sector.

Asian stocks outside Japan rose 0.6 percent, poised for their biggest monthly gain since July 2009, up 11.8 percent, in what is historically one of the worst months for stocks.

Japan's Nikkei closed up 0.7 percent, helped by quarter-end window dressing and expectations that the BOJ will respond to the worsened outlook from Japanese manufacturers by further easing its policy when it meets on Oct. 4-5.

The closely watched tankan survey showed confidence improved for a sixth straight quarter but firms turned negative on the outlook, possibly a sign of growing concerns that a strong yen could derail the fragile economic recovery.

Waiting for the Fed

The dollar index dipped to as low as 78.856, the lowest since early February, hurt by recent speculation that the US Federal Reserve may embark on a second round of quantitative easing later this year.

The weak dollar pushed gold to an all-time high and silver to a 30-year high as ETF holdings hit another record.

Gold rose to $1,310.10 an ounce -- its eighth record-high session this month.

US consumer confidence fell to its lowest level in seven months, the latest in a series in data that give a mixed signal on the economy, with unemployment levels at 26-year highs and access to credit still tight.

The Federal Reserve said last week it was prepared to put more money into the economy, if needed, to stimulate the recovery and avoid deflation.

The Fed is probably preparing a fresh round of quantitative easing measures to announce at the end of its Nov. 2-3 meeting, hedge fund adviser Medley Global Advisors said in a report on Tuesday, a market source told Reuters.

The Wall Street Journal reported that the Fed is also weighing a more open-ended, smaller-scale bond buying program.

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Dollar weak, gold peaks as Fed, BOJ action eyed

Photo: AFP

HONG KONG - The dollar hit an eight-month low, driving gold to a record high, on rising expectations the Federal Reserve will act again to help the struggling economy while new evidence of China's robust health lifted European stocks.

Europe's major equity markets rose on Wednesday, with the pan-European FTSEurofirst 300 index of top shares up 0.6 percent in early trade, making up for Tuesday's decline, spurred by news of a dip in US consumer confidence.

Gold rose as the Fed and Bank of Japan look to pump more funds into markets via bond purchases and other measures to help their struggling economies.

"The backdrop for the dollar continues to deteriorate," JPMorgan said, advising clients to seize any bounce in the dollar as a chance to sell.

"The increased focus on QE and the break of several key dollar support levels maintained the overall bearish bias."

Japanese government bond futures hit a seven-year high while US Treasury yield curve moved on Tuesday to its flattest since early September over expectations of further monetary easing by both central banks.

Such expectations were reinforced by a fall in US consumer confidence to its lowest since February and a worsening outlook in Bank of Japan's quarterly tankan survey of major companies.

Stock markets, however, found support in a rise in HSBC's China Purchasing Managers' index to a five-month high in September, which pointed to renewed, though moderate, momentum in China's vast industrial sector.

Asian stocks outside Japan rose 0.6 percent, poised for their biggest monthly gain since July 2009, up 11.8 percent, in what is historically one of the worst months for stocks.

Japan's Nikkei closed up 0.7 percent, helped by quarter-end window dressing and expectations that the BOJ will respond to the worsened outlook from Japanese manufacturers by further easing its policy when it meets on Oct. 4-5.

The closely watched tankan survey showed confidence improved for a sixth straight quarter but firms turned negative on the outlook, possibly a sign of growing concerns that a strong yen could derail the fragile economic recovery.

Waiting for the Fed

The dollar index dipped to as low as 78.856, the lowest since early February, hurt by recent speculation that the US Federal Reserve may embark on a second round of quantitative easing later this year.

The weak dollar pushed gold to an all-time high and silver to a 30-year high as ETF holdings hit another record.

Gold rose to $1,310.10 an ounce -- its eighth record-high session this month.

US consumer confidence fell to its lowest level in seven months, the latest in a series in data that give a mixed signal on the economy, with unemployment levels at 26-year highs and access to credit still tight.

The Federal Reserve said last week it was prepared to put more money into the economy, if needed, to stimulate the recovery and avoid deflation.

The Fed is probably preparing a fresh round of quantitative easing measures to announce at the end of its Nov. 2-3 meeting, hedge fund adviser Medley Global Advisors said in a report on Tuesday, a market source told Reuters.

The Wall Street Journal reported that the Fed is also weighing a more open-ended, smaller-scale bond buying program.

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Japan PM says ready to step into forex markets again

Foreign exchange broker stand in front of a television screen showing Japan's Finance Minister Yoshihiko Noda speaking to the media in Tokyo September 15, 2010.

Photo: Reuters

TOKYO - Japan's prime minister signaled on Thursday authorities would keep intervening to curb yen strength as sagging manufacturing confidence underscored the threat the currency poses to the fragile economic recovery.

A Reuters monthly poll that tracks the Bank of Japan tankan report showed manufacturing confidence dropped in September from August for the first time in nearly a year as firms struggled with the yen's rise to a 15-year high against the dollar.

Responding to the concerns about the yen's rise, authorities intervened in markets on Wednesday for the first time in six years to knock the currency lower by selling an estimated 2 trillion yen.

Prime Minister Naoto Kan, who fended off a leadership challenge from a ruling party powerbroker this week, pointed on Thursday to more yen selling if needed.

"If rapid fluctuations in the yen harm Japanese firms' appetite for investing at home and push them to shift their factories overseas, that could further worsen job conditions and affect to overcome deflation," Kan said.

"I will take decisive steps if needed from now on as well," he told a business group.

Some currency traders see the likelihood of another round of intervention would increase if the dollar slipped back below 85 yen. Its now trading at 85.4 yen, having strengthened from around 83 yen before the intervention.

Pressure on BOJ?

Kan, struggling to unify his party and facing a divided parliament, wants to be proactive in tackling the yen after winning the ruling party leadership race on Tuesday.

He is expected to reshuffle his cabinet soon but retain Yoshihiko Noda as finance minister.

"He is trying to send a message of his party's solidarity. He is showing the strong intention of Japan to take decisive action through intervention," said Ayako Sera, market strategist at Sumitomo Trust & Banking.

A panel of junior lawmakers in the ruling Democratic Party of Japan urged the Bank of Japan to call an extraordinary meeting to ease policy and so support the government's efforts.

Central bank sources have said the authority has no plan to call an emergency meeting but it is ready to act at its next scheduled meeting in early October if the economic recovery remains under threat.

The panel suggested the BOJ increases its buying of Japanese government bonds, although BOJ Governor Masaaki Shirakawa reiterated his opposition to the idea.

"We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies," Shirakawa said in a conference speech.

Shirakawa told a securities dealers' gathering later on Thursday that the BOJ would take timely action as needed and keep providing ample funds to money markets.

In addition, sources familiar with the matter said on Wednesday the BOJ will not drain the money flowing into the economy as a result of the selling, indicating it plans to use the sold yen as a monetary tool to boost liquidity in the economy.

Yen threat to exports

The intervention pushed the dollar more than 3 percent higher on Wednesday, a big move for a currency.

Japan faced some international criticism for its solo intervention. Since most advanced economies are grappling with slow growth at home, making exports an economic imperative, Japan's move heightened concerns countries would launch a round of competitive devaluations to support their own exports.

US lawmaker Sander Levin, who chairs a congressional committee examining China's currency policy, blamed Beijing for Japan's "deeply disturbing" intervention.

But Kan faces domestic pressure for more action on the yen.

"The dollar has recovered to about 85 yen now after the government and Bank of Japan intervened yesterday, and we want them to continue taking strong action to reverse the yen's strength," Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, told a news conference.

"A dollar of 85 or 90 yen is not a level at which job losses can be prevented in Japan," he added.

Japan's economic recovery from the global crisis has faltered with export growth slowing down. Signs the US recovery is also stuttering has added to Tokyo's concerns.

Underlining those concerns, the Reuters Tankan survey, which has a 95 percent correlation with the BOJ's closely watched quarterly tankan business sentiment survey, showed the manufacturers' sentiment index fell 5 points from August to plus 17, down for the first time since October 2009.

Still, the Reuters index has risen during the July-September quarter, suggesting the BOJ data due on out on September 29 will also show a rise.

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Japan intervenes to weaken yen for 1st time in 6 years

Foreign exchange broker stand in front of a television screen showing Japan's Finance Minister Yoshihiko Noda speaking to the media in Tokyo September 15, 2010.

Photo: Reuters

TOKYO - Japan sold the yen in the market on Wednesday for the first time in six years, trying to stop the currency's relentless climb from hurting exporters and threatening a fragile economic recovery.

Fresh after a victory in party leadership contest, Japan's Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.

Estimates vary on how much Japan has spent so far in its first intervention in the foreign exchange market since spending 35 trillion yen in 2003-2004. Dealers talk about 300-500 billion yen though some reports put it closer to 100 billion yen.

The US dollar extended its gains against the yen after an official at Japan's Ministry of Finance said intervention was not finished, climbing more than 2 percent on the day above 85 yen and nearly two yen above a 15-year low.

Wednesday's action pleased its target audience: major Japanese exporters.

"We applaud the move by the government and the Bank of Japan to correct the yen's strength." Japan's No. 2 automaker Honda Motor Co. said in a statement. Honda has penciled in the yen at 87 to the dollar in its financial estimates for the 2010/2011 business year.

The Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said, indicating coordinated efforts with the government to support the economy.

The central bank may follow up with additional steps, such as buying more government debt, economists said.

Analysts doubt other countries would help Japan tamp down the yen since they also need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also makes any attempts by major economies to weaken their currencies particularly sensitive.

Sympathy

Japan's Finance Minister Yoshihiko Noda indicated that Tokyo acted alone, but said he was in contact with overseas authorities and analysts said Japan would probably be spared international criticism.

"Japan will be seen as a special case. Obviously its economy has been in significant trouble for a while, stocks have been depressed for some time, export performance relative to the Asian peer group has been very weak," Simon Flint, global head of foreign exchange research with Nomura in Singapore, said.

"To some degree there will be some sympathy in the rest of the world for Japan's predicament."

US officials at the Federal Reserve and the Treasury declined to comment immediately about Tokyo's action.

Analysts doubted whether Kan's government was ready for another protracted battle similar to the 15-month yen selling spree earlier this decade given lingering questions about the effectiveness of the last campaign.

"The amount of intervention isn't likely to be as much as Japan was spending the last time it intervened, so it won't be enough to stop dollar/yen from falling. It is also unlikely that other countries will cooperate," said Junya Tanase, currency strategist at JP Morgan in Tokyo.

Noda would not say whether the authorities were buying dollars, but two traders said the Bank of Japan appeared to have bought dollars around 83 yen at the start of the action.

The Bank of Japan acts on behalf of the Ministry of Finance in currency intervention.

"We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on," Noda told reporters at a hastily arranged news conference.

The dollar had hit a 15-year-low at 82.87 yen earlier in the day but was at 85.12 yen by midday.

Will the yen stop rising?

Kan's government has been trying to talk down the yen as it kept moving away from the 90 yen per dollar level most exporters had assumed in their financial plans. Until Wednesday, however, it had stopped short of intervening, apparently worried that acting without Group of Seven partners would not achieve much.

Kan was re-elected ruling party leader on Tuesday, decisively fending off a challenge from powerbroker Ichiro Ozawa, an outspoken advocate of intervention.

"There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote yesterday," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

"The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It's not clear."

The yen had surged to its highest against the dollar since 1995, as low US interest rates have made the dollar cheap to borrow and swap for higher-yielding assets and as talk has resurfaced that the Fed might loosen its policy further.

The Japanese currency's rise has brought it closer and closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 1.8 percent on the day as news of the intervention spread.

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BOJ vows timely action but few clues on next move

Bank of Japan (BOJ) Governor Masaaki Shirakawa answers questions during a press conference at the BOJ headquarters in Tokyo.

Photo: AFP

TOKYO - The Bank of Japan (BOJ) stood pat on monetary policy on Tuesday but vowed timely action when needed, setting the stage for possible easing next month when it has clarity on political leadership and the strong yen's damage to the slowing economy.

But Governor Masaaki Shirakawa offered few clues on what exactly the BOJ may do next and said monetary authorities could not control foreign exchange rates, triggering yen buying on speculation no aggressive easing was on the horizon.

"The dollar approached its 15-year low of 83.58 yen because of disappointment over Shirakawa's comments," said Keiji Matsumoto, currency strategist at Nikko Cordial Securities.

"He doesn't seem to suggest additional easing. Unless the BOJ fully downgrades its economic assessment, it will not take new additional steps. The dollar/yen could fall to around 82 yen."

Still, government pressure on the BOJ for more aggressive steps will likely grow in coming months with the economy expected to slow and as a leadership battle in the ruling party raises the chances of looser fiscal policy, analysts say.

Japanese government bonds tumbled in the last two weeks on worries of a possible shift away from Prime Minister Naoto Kan's efforts to rein in Japan's huge debt pile if he loses a Sept. 14 vote for the party's top spot to powerbroker Ichiro Ozawa.

Media surveys suggest Ozawa could win and investors are speculating he may be forced to issue more bonds to keep spending promises made when the party swept to power last year.

"So far, the market expectation is that Ozawa would pursue more fiscal expansion than Kan, and the market has to some extent priced in the possibility that Ozawa may become the next prime minister," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.

"Fiscal expansion can easily be associated with a rise in government pressure on the BOJ to ease. And there are many market players who are looking at it that way."

Others expect the BOJ to come under pressure no matter who wins the battle to head the Democratic Party of Japan.

"The BOJ has a tricky political road regardless of who leads the Democrats. Ozawa might pressure the BOJ, but if Kan stays and there's no big fiscal stimulus, this could also pressure the BOJ," said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong.

No aggressive action?

After easing policy just last week, the BOJ kept interest rates on hold at 0.1 percent on Tuesday but warned that it would take appropriate and timely action when necessary.

The central bank also repeated that it needed to watch out for downside risks to growth amid increasing uncertainty over the outlook for the US economy, which has jolted currency and stock markets in recent weeks.

But market players see a small chance of aggressive easing steps from the Japanese central bank as it stuck to its forecast of a moderate economic recovery, and Shirakawa said monetary policy was not directly aimed at the yen.

"We are always considering various policy options," Shirakawa told a news conference. "But monetary authorities are unable to control currency rates freely ... We are carefully watching how the yen's rise impacts the Japanese economy."

The yen briefly climbed to 83.70 against the dollar, near the 15-year high hit last month, following his comments.

Japanese policymakers have tried to talk down the yen and threatened to intervene in the currency market after its surge.

The BOJ also stands ready to ease further if the yen soars at a pace of 1 to 2 percent in a single day. Otherwise, it hopes to wait until next month, when it is seen revising down its economic and price forecasts in a semiannual report due on Oct. 28.

The BOJ boosted its cheap loan scheme on Monday of last week, bowing to government pressure for steps to protect the fragile recovery. But the move did little to deter yen gains or stock price falls as investors saw it as a symbolic gesture with little effect in supporting the economy and beating deflation.

That has led some BOJ officials to believe that bolder action is needed to send a clearer message to markets that it is determined to keep the strong yen from harming the economy.

There is no consensus yet on what the next step should be, but the list of options includes a return to zero interest rates and an increase in the bank's government bond purchases.

Expectations of further monetary easing have pushed down the short end of Japan's bond yield curve, while the long end has been pushed up by speculation that Ozawa, if he wins next week's vote, may take a more fiscal expansionary stance than Kan.

But the yield curve has flattened beyond the 10-year zone lately as investors hunting for bargains trimmed earlier losses in the superlong sector, suggesting that the recent sharp rise in yields may have started to peter out.

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Japan announces fresh stimulus measures

Bank of Japan (BOJ) Governor Masaaki Shirakawa answers questions during a press conference at the BOJ headquarters in Tokyo.

Photo: AFP

Japan on Monday unveiled an US$11 billion stimulus and announced monetary steps to safeguard a fragile economy and curb the impact of a strong yen, but markets were left unimpressed.

Prime Minister Naoto Kan announced the 920 billion yen stimulus package and the central bank extended a multi-billion-dollar loan scheme in a bid to boost an economy beset by deflation and curb the strength of the yen.

Kan said the plan will include steps to boost employment for graduates, investment in green industries and support for smaller businesses and measures to boost consumption, adding it would get final approval on September 10.

The stimulus package would be financed by reserve funds, but Kan added that the government would consider compiling an additional budget if necessary.

The announcement followed an emergency meeting by the Bank of Japan in response to recent government pressure to counter the strong yen. But the unit moved higher after the bank unveiled its plans, with markets underwhelmed.

In its second loan expansion since March, the bank said it would offer 10 trillion yen ($118 billion) in six-month low interest loans in addition to 20 trillion yen from December's three-month loan scheme.

Domestic banks will be able to borrow a total of 30 trillion yen from the central bank for maximum of six months against pooled collateral, at the rate of 0.1 percent.

The move would help lower interest rates in the market place with a view to easing the yen's strength, said the bank, which left its key rate unchanged at 0.1 percent.

"The bank believes that the monetary easing measure, together with the government's efforts, will be effective in further ensuring Japan's economic recovery," it said.

However, markets took a dim view of the widely expected BoJ steps, with the yen strengthening to below 85 against the dollar and the Nikkei index paring back earlier three percent gains to close up 1.76 percent.

With investors having anticipated the announced steps, which took place on a day major forex centre London was closed for a public holiday, the impact of the decision will be "close to zero," said Macquarie Bank's Richard Jerram.

"It's largely a charade," he said.

The strong yen, which last week hit 15-year highs against the dollar, threatens the overseas profits of Japan's export sector, crucial to driving growth while making imports cheaper and prolonging a deflationary cycle.

A recent government survey suggested that many companies in Japan were considering moving production overseas if the yen stayed high.

Analysts say the BoJ, which has kept rates at 0.1 percent since the height of the financial crisis, has little room to move. Despite low rates, years of stagnation sapped demand for loans from companies and consumers.

"The latest measures serve little to boost the economy as there is no demand to borrow money amid such currently bad business sentiment,” said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.

And with the United States and Europe seemingly happy to reap the trade benefits of their weaker currencies, analysts say any unilateral currency move by Japan would be unlikely, and at best ineffective.

It last intervened in forex markets in 2004.

The country remains under pressure to protect its fragile recovery, with weak gross domestic product growth of an annualized 0.4 percent in the second quarter pointing to a slowdown.

Core consumer prices eased 1.1 percent in July, the 17th consecutive monthly fall, casting a darker shadow over the government's goal of ending deflation in the fiscal year starting April 2011.

Persistent deflation prompts consumers to defer purchases in the hope of further price falls and deters corporate capital spending.

Fears for the health of the global economy have increased in recent weeks, and US Federal Reserve chief Ben Bernanke on Friday vowed to act if "unexpected developments" further threaten the shaky US recovery.

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