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US dollar rallies on dim global growth outlook

Analysis

The US dollar rose sharply to a five-month high against the euro and Asian stocks fell on Friday, as investors expected the malaise that has afflicted the US economy would spread to other countries.

While the US economy has not greatly improved by almost any measure, investors have begun to reassess other parts of the world, particularly after the European Central Bank president said the euro zone faces substantially weaker growth this year and a Japanese official warned the world’s second-largest economy may be in a recession. “We are seeing a shift away from a focus on the US to a more global problem,” said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. “The dollar is getting a boost by default.”

The benchmark yield on the 10-year Japanese government bond, which moves in the opposite direction to the price, tumbled to a four-month low following an overnight rally in US Treasuries, as investors scrambled to the relative safety of government debt. This week the dollar has rallied 2%, as measured by an index of six major currencies on the ICE futures exchange .DXY, and has closed on a daily basis above its 200-day moving average -- a technical signal of a potential turnaround that has not happened since April 2006.

The euro was down more than 0.6% at $1.5225, extending a decline that began overnight after comments from ECB President Jean-Claude Trichet suggested interest rates were on hold. Against the yen, the dollar rose 0.25% to 109.58 yen. Japan’s Nikkei share average N225 was down 0.6%, with shares of Shin-Etsu Chemical, the world’s biggest maker of silicon wafers, the heaviest drag on the index.

“As the government report said, the Japanese economy has been deteriorating, and in such an environment investors cannot buy domestic demand-oriented stocks and banks,” said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo. Toyota stock jumped 4.6% after the world’s biggest auto maker clung to its earnings forecasts despite a 28% fall in quarterly net profit.

Outside Japan, Asia-Pacific stocks were down 0.7%, creeping back toward a 16-month low hit on Tuesday. Australia’s benchmark S&P/ASX 200 index slipped 0.8%, with top banks among the biggest drags.

In the bond market, the 10-year JGB yield fell to 1.480%, the lowest in four months. It later pulled back to 1.495% for a decline of 2 basis points on the day. Short-term yields, which tend to most strongly reflect shifts in the outlook for monetary policy, declined as well, with the 2-year yield at a four-month low of 0.670%.

US crude oil futures were steady around $120 a barrel on Friday, recovering from three-month lows amid concerns a 1 million barrel per day pipeline that was attacked by Kurdish separatists in Turkey could remain shut for up to two weeks. In recent weeks, growth has overshadowed inflation as a top concern of investors, especially with Britain, Germany, Japan and possibly the United States all facing recession.

The US Federal Reserve held rates steady at 2% on Tuesday and, like the ECB, expressed concerns about both the slowing economy and rising inflation. The Fed indicated it is in no rush to push borrowing costs higher.

Gold fell further as the dollar rallied, reducing the metal’s appeal as an alternative investment. Bullion dropped nearly $8 in New York on Thursday, and is down 11%  since the middle of last month. (Reuters)

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