Market Review – 29/03/2011 18:44 GMT
U.S. dollar rallies against the Japanese yen to post G7-intervention high of 82.48
The greenback rose to post G7-intervention highs against the Japanese yen and other major currencies on Tuesday due to anticipation of widening in spread between U.S. and Japanese yields together with hawkish comments from St. Louis Federal Reserve bank President James Bullard. The two-year U.S. Treasury yield rose to 0.81%, eight basis points above Friday’s close and up 18 basis points in six days, widening its gap over comparable Japanese yields. U.S. dollar, euro and aussie rallied against the Japanese yen to 82.48, 116.35 and 84.93 respectively on speculation that repatriation flows into Japan may fail to emerge.
Japanese Finance Minister Yoshihiko Noda reiterated that Japan should not be too quick to rely on bond issuance to fund an extra budget to pay for disaster relief in the wake of this month’s devastating earthquake and tsunami. Noda added the size of the extra budget has not been determined yet because ministries are still trying to grasp the extent of the damages.
The single currency rebounded from Monday’s low of 1.4021 to as high as 1.4149 in European morning on Tuesday after ECB chief Trichet reiterated his recent hawkish comments on Monday and said higher interest rates are likely, however, euro tumbled after St. Louis Federal Reserve bank President James Bullard said in Prague, Czech Republic that Fed may start tightening before global risks fixed and indicated the U.S. economy was strong enough to curtail the Fed’s $600 billion bond-buying program by $100 billion. The single currency extended intra-day decline to 1.4047 after S&P cut Portugal sovereign credit ratings to BBB-/A-3 from BBB/A-2. S&P said Portugal’s rating, now one level above junk status, has a negative outlook. Portuguese 2-year government bond yields hit new euro lifetime high of 7.699% after S&P downgrade.
ECB Governing Council member Jozef Makuch said the European Central Bank is ‘highly’ likely to raise its main interest rate from the current record-low level of 1.0% next month.
German Finance Minister Schaeuble said that if Ireland sees need to renegotiate bailout, Ireland must show extra measures as Greece did. He added that nothing has changed since EU’s March 11 assessment that Portuguese reforms are sufficient. He also said that risk of contagion in eurozone now is lower than year ago and sees no impact on eurozone policy from German state election defeat. Schaeuble said that he will see concrete movements within G20 on global monetary system this year, and energy and commodity policy will become more important in G20. He also sees needs of guarding against speculation and developing countries should build capital markets to reduce speculative investment. Schaeuble added that G7 currency intervention is good but in future China and BRIC states should contribute.
The British pound fell sharply from 1.6045 to 1.5943 on Tuesday before recovering after holding above Monday’s 1.5937 low.
British Prime Minister David Cameron said forces loyal to Libyan leader Muammar Gaddafi were carrying out ‘murderous attacks’ on the city of Misrata. Cameron said his message to the people of Libya was ‘there are better days ahead.’
On the data front, U.S. March consumer confidence index dropped to 63.4 versus economists’ forecast of 65.0 with upwardly revised reading of 72.0 in February.
Data to be released on Wednesday:
Japan’s industrial production; EU business climate, economic, industrial and consumer sentiment; Swiss KOF indicator; U.K. CBI distribution trade; U.S. ADP employment.