Currencies volatile on G7 policy doubts

REUTERS

A bull and a bear styrofoam figurine.

London - The yen rose against the dollar but steadied against the euro on Wednesday after a G7 statement on exchange rates, designed to calm talk of a currency war instead provoked fresh worries.

The G7 reaffirmed its commitment to market-determined exchange rates and said fiscal and monetary policies must not be directed at devaluing currencies - comments which at first were seen as supporting the recent weakness in the yen.

However, an official from the group later said Tuesday's statement was meant to signal concerns about excessive yen moves, prompting a vicious reversal in the currency.

“The world's in turmoil with regard to currencies and it doesn't really take a lot, in terms of a bad word here or there, to spark volatility,” Peter Dixon global financial economist at Commerzbank said.

Analysts were also concerned about the apparent lack of consensus at the G7 level in tackling the risks of competitive currency devaluations as countries try to spur growth through expansionary domestic monetary policies.

The dollar and the euro both initially fell against a resurgent yen on Wednesday with the greenback down 0.15 percent at 93.33 yen. The common currency recovered slightly to be flat at 125.80 yen.

There was some good news for the euro area when data showed industrial production rose a surprisingly strong 0.7 percent in December from the previous month although it is down 2.4 percent for the year.

JAPAN CENTRE STAGE

At the centre of the debate is Japan, where Prime Minister Shinzo Abe's government is pushing for aggressive policies by the Bank of Japan to beat deflation through monetary expansion.

Anticipation of the bolder measures has sent the yen down nearly 20 percent against the dollar since November, sparking comments from policymakers in the euro area, which is struggling to get out of recession, about the impact on its currency.

“Everyone would love a weaker currency, but it's a zero sum game. If you weaken the yen someone else has to suffer a stronger currency,” said Dixon.

However, he added it was not just about the yen as there were concerns about the US Federal Reserve's current aggressive monetary expansion, which has weakened the dollar, and the Swiss central bank's move to cap rise in the franc against the euro.

The confusion sown by the G7 statement has also heightened the risk that policymakers will use a G20 meeting in Moscow on Friday and Saturday to make further comments, either about the yen or the risk of wider currency devaluations.

“Presumably on the weekend there will be something that talks about the pace of moves in the yen. That's what the market is expecting now,” said Geoff Kendrick, FX strategist at Nomura.

In the UK the Bank of England helped push sterling lower on Wednesday when it lowered its current growth forecast and said it was open to more asset purchases.

The Bank quarterly inflation report said the monetary policy committee had “agreed that it stood ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.”

EQUITIES STEADY

Europe's share markets were little changed on Wednesday morning, hovering below the top of a six-day trading range, with investors more focused on a mixed raft of corporate results than moves in the currency markets.

The FTSE Eurofirst 300 index of top companies was unchanged at 1,161.58 points, less than two points below an intraday high of 1,162.77 points hit last week.

Around Europe, UK's FTSE 100 index was down 0.2 percent, Germany's DAX index was up 0.2 percent, and France's CAC 40 was unchanged.

“We're in a lull right now, we've run out of positive catalysts and the great rotation out of fixed income and into equities hasn't really started,” said David Thebault, head of quantitative sales trading, at Global Equities.

US stock index futures pointed to a slightly higher open on Wall Street, with futures for the S&P 500, the Dow Jones and the Nasdaq 100 all between 0.1 and 0.2 percent higher.

Debt markets were also mostly steady as investors focused on an auction of long-term Italian debt, seen as a good test of investor demand before elections later this month.

Italy's debt has been under pressure in recent weeks as a comeback in the opinion polls by former Prime Minister Silvio Berlusconi's party has raised the prospect of a fragmented parliament that could hamper the next government's reforms.

Investors bought 888 million euros ($1.0 billion) of the new bonds maturing in September 2040 at a yield of 5.07 percent. Demand was 1.97 times the offer.

Ten-year Italian yields were 2 basis points lower on the day at 4.485 percent. - Reuters