Yen and the dollar shift into retreat
Web posted at: 7/18/2009 8:22:50
Source ::: FINANCIAL TIMES
By Peter Garnham
The yen and the dollar suffered this week as better-than-expected US corporate earnings and improving economic data boosted investor confidence. Forecast-beating second-quarter earnings figures from the likes of Goldman Sachs, the bank, and Intel, the chipmaker, prompted a sharp rally in global equities. Growing risk appetite fed through to the currency markets, weighing on haven demand for the yen and the dollar, and boosting higher-yielding currencies, especially those with commodity links.
Signs of a pick-up in the global economy, most notably in China, added to investor optimism. Analysts said a string of Chinese economic data releases on Thursday reaffirmed the country’s economic resilience and validated its fiscal stimulus packages.
Chinese growth figures accelerated from an annual rate of 6.1 percent in the first quarter to 7.9 percent in the second, outstripping forecasts. Meanwhile Chinese industrial production gained 10.7 percent in June, the largest increase for nine months.
Improving sentiment hit the yen hardest. Over the week, it fell 1.7 percent to Y94.04 against the dollar, dropped 2.9 percent to Y132.76 against the euro and lost 2.7 percent to Y153.66 against the pound. The yen’s losses were more acute against commodity-linked currencies as raw material prices rallied. Over the week, it fell 4.7 percent to Y75.43 against the Australian dollar, lost 6.1 percent to Y84.31 against the Canadian dollar and dropped 4.6 percent to Y60.69 against the New Zealand dollar.
Falling haven demand also hit the dollar, but the US currency faced additional pressure from news that China’s foreign exchange reserves, the world’s largest, had grown by a record $178.3bn to $2,130bn in the second quarter. Analysts said the largest increase in reserves was in May, when the dollar weakened sharply as Treasury yields in the US rose. Fear of a weaker dollar contributed to inflows to China, sparking offsetting intervention by the Chinese authorities to stem strength in the renminbi.
Analysts said the pace of accumulation suggested China was having difficulty in diversifying its foreign exchange stockpiles in the short term. It is estimated that the Chinese authorities hold 65-70 per cent of their reserves in dollars, with the rest in other currencies including the euro, pound and yen. Rapid accumulation of dollars as the Chinese authorities seek to maintain the balance in their reserves puts downward pressure on the US currency.
“When central banks accumulate reserves, it typically signals that the private sector is selling dollars and central banks are filling the gap,” said Steven Englander at Barclays Capital. Over the week, the dollar dropped 1.2 percent to $1.4109 against the euro, fell 0.6 percent to SFr1.0779 against the Swiss franc and dropped 0.9 percent to $1.6337 against the pound. The South African rand rose 1.3 percent to R8.0705 against the dollar.
