BLBG: Dollar Gains as China Moves to Slow Grow, Deterring Risk Demand
By Lukanyo Mnyanda and Yoshiaki Nohara
Jan. 26 (Bloomberg) -- The dollar and yen climbed against higher-yielding currencies on speculation China will take further steps to cool its economy, discouraging demand for higher-yielding assets.
The yen rose against the New Zealand dollar and South Korean won as people familiar with the matter said China’s banks have begun restricting new loans. The euro fell versus the dollar as the European Central Bank executive board member Juergen Stark expressed concern that widening deficits in the region will undermine investor sentiment. Greece sold bonds at premium yields to entice buyers.
Currency moves “indicate how seriously people are taking the China tightening story and how central China’s economy is to expectations of where global growth is going this year,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. “The impact was to push the whole idea of risk aversion. It’s negative for a lot of the other currencies against the dollar.”
The dollar gained 0.5 percent to $1.4075 per euro at 7:16 a.m. in New York, from $1.4151 yesterday. It traded at $1.4029 on Jan. 21, the strongest level since July 30. The yen appreciated 1.2 percent to 126.20 per euro, from 127.75, after reaching 125.94, the strongest level since April 28. Japan’s currency advanced 0.7 percent to 89.62 per dollar, from 90.28. It touched 89.39, the strongest level since Dec. 18.
China’s Lending
China’s banks have suspended new lending since Jan. 19 across the country, Dong Tao, a Hong Kong-based economist at Credit Suisse Group AG, wrote in a note to clients. The central bank raised the proportion of deposits banks must set aside as reserves earlier this month.
Bank of China Ltd. has stopped extending new corporate loans in the Shanghai area except for clients who have repaid earlier borrowings, said a person familiar with the matter who declined to be identified.
Europe’s Dow Jones Stoxx 600 Index headed for a fifth day of losses and was 0.7 percent lower. The Nikkei 225 Stock Average fell 1.8 percent, and the Shanghai Composite Index retreated 2.4 percent. U.S. stock-index futures slid.
The yen typically strengthens in times of financial turmoil because Japan’s trade surplus means the nation doesn’t have to rely on overseas lenders. The dollar benefits as the world’s main reserve currency.
Japan’s ‘Slower Pace’
The yen briefly pared gains after Standard & Poor’s said the policies of the ruling Democratic Party of Japan “point to a slower pace of fiscal consolidation than we had previously expected.” Japan’s rating could be cut if the government fails to come up with measures to spur growth and economic data remains weak, said S&P, retaining Japan’s AA long-term rating.
The Bank of Japan held its target lending rate at 0.1 percent today and said it remains committed to fighting deflation. Finance Minister Naoto Kan said the BOJ has more options for fighting deflation. The central bank said on Dec. 1 that it will set aside 10 trillion yen ($111 billion) to make three-month loans at interest of 0.1 percent.
The pound declined against the euro after a report showed the U.K.’s economy resumed growth in the fourth quarter less than economists estimated. Sterling traded at 87.31 pence per euro, compared with 87.13. It traded at 86.51 pence on Jan. 20, the strongest level since Aug. 21.
Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase.
‘Barely Positive’
“The barely positive GDP outcome represents a major disappointment against evidence pointing to a firmer acceleration in economic activity,” Tullia Bucco, an economist at UniCredit SpA in Milan, wrote in a client note.
The euro fell against the dollar as the ECB’s Stark said in a speech in Frankfurt today that the central bank is “seriously concerned about the sharp rise forecast for public deficits and debt in euro member countries.”
European governments may need to borrow 2.2 trillion euros ($3.1 trillion) from capital markets in 2010, or 19 percent of GDP, to finance deficits and roll over existing debt, Fitch Ratings said today.
Greece sold 8 billion euros of five-year bonds, receiving 25 billion euros in orders after offering 0.3 percentage point more yield than on the nation’s existing debt with similar maturities. The nation’s credit rating was cut by Standard & Poor’s, Moody’s Investors Service and Fitch last month.
Federal Reserve policy makers will probably keep their target lending rate at zero to 0.25 percent tomorrow, according to the median estimate of economists in a Bloomberg News survey.
“The Fed is widely expected to leave both policy unchanged and maintain the ‘extended period’ line in describing how long they will keep rates at accommodative levels,” said Danica Hampton, a senior strategist at Bank of New Zealand Ltd. in Wellington. “As such, we wouldn’t be surprised to see a bout of dollar weakness towards the latter half of the week.”
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
