Dollar Strengthens on Concern G-20 May Tighten Investment Rules
Sept. 25 (Bloomberg) -- The dollar rose, set to snap a two-week decline against the euro, on speculation Group of 20leaders will agree to tighten rules on investment, boostingdemand for so-called safe-haven currencies.
The dollar gained versus 13 of its 16 major counterparts asU.S. officials said they supported a plan to strengthen capitalrequirements and force banks to tie compensation more closely torisk. The yen headed for a weekly advance versus the euro onprospects Japanese companies will keep bringing home earnings onoverseas assets before the end of the half fiscal year.
“Worries the G-20 may impose stricter financial marketregulations are causing risk aversion,” said Toshihiko Sakai,head of trading for foreign exchange and financial products atMitsubishi UFJ Trust & Banking Corp. in Tokyo. “There’s safe-haven buying of the dollar and the yen.”
The dollar advanced to $1.4657 per euro as of 12:01 p.m. inTokyo from $1.4666 yesterday in New York and from $1.4712 a weekearlier. The greenback is set for a 0.4 percent weekly gainagainst Europe’s single currency, the first advance since thefive days ending Sept. 4. The dollar traded at 1.0296 Swissfrancs from 1.0298 francs, and fetched C$1.0895 from C$1.0892.
The yen climbed to 132.78 per euro from 133.86 in New Yorkyesterday, after earlier reaching 132.53, the highest levelsince Sept. 16. It rose to 90.59 per dollar from 91.27.
G-20 leaders have signaled they’re ready to clamp down onbanker pay as they seek to curb behaviors that helped triggerthe global financial crisis. The collapse of the U.S. propertymarket in 2007 led to the global recession and resulted in $1.62trillion of writedowns and credit losses at banks and otherfinancial institutions, according to data compiled by Bloomberg.
Excessive ‘Games’
“There will be broad agreement around many elements of acompensation package,” Michael Froman, U.S. President BarackObama’s liaison to the G-20, told Bloomberg Television. TreasurySecretary Timothy Geithner promised “a far-reaching set ofstandards” that would take effect immediately. The G-20 kickedoff a two-day meeting yesterday in Pittsburgh.
The dollar and yen, commonly used as funding currencies forhigher-yielding assets, rose after new Japanese Prime MinisterYukio Hatoyama, speaking before the United Nations GeneralAssembly, pledged cooperation with other G-20 leaders inreducing income disparity and “excessive money-making games.”
Federal Reserve Governor Kevin Warsh said the U.S. centralbank may need to be as aggressive in reversing money-easingactions as policy makers were in starting them.
“If ‘whatever it takes’ was appropriate to arrest thepanic, the refrain might turn out to be equally necessary at astage during the recovery to ensure the Federal Reserve’sinstitutional credibility,” Warsh said in an opinion pieceposted late yesterday on the Wall Street Journal’s Web site.
Policy Pullback
The Federal Reserve and U.S. Treasury said yesterdaythey’re scaling back emergency programs aimed at combating thefinancial crisis, reducing support for firms that now have aneasier time getting funding.
European policy makers are also moving to withdrawstimulus. The European Central Bank said it will discontinue its84-day U.S. dollar liquidity-providing operations with the Fed“given the limited demand and the improved conditions infunding markets.” The ECB will keep conducting seven-day dollaroperations.
“The announcements by these central banks triggered buy-backs of the dollar, which was used to finance investments onriskier assets,” said Fumio Mizutani, a currency analyst atcurrency-margin company ODL Japan Co. “We now need to carefullyascertain whether this action will affect dollar-carryinvestments.”
In carry trades, investors borrow in a nation with lowinterest rates and invest where returns are higher. The risk insuch trades is that currency market moves will erase profits.
British Pound
Benchmark interest rates are 2.5 percent in New Zealand and3 percent in Australia, compared with 0.1 percent in Japan andas low as zero in the U.S, making investments in the SouthPacific nations’ comparatively attractive.
The pound dropped after the Newcastle Journal reportedyesterday that Bank of England Governor Mervyn King said thepound’s decline is “very helpful” in rebalancing the U.K.economy.
“The pound was the star of all the currencies that felltoday,” said Takashi Kudo, director of foreign-exchange salesin Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph &Telephone Corp.
The pound declined to as weak as $1.5918 today, the lowestsince June 8, from $1.6059 yesterday in New York. The U.K.currency dropped to 91.93 pence per euro, reaching the weakestlevel since April 1.
Repatriation
Japan’s currency is set for a weekly advance versus 14 ofits 16 major counterparts on prospects the nation’s exporterswill take advantage of an April 1 rule change that waives taxeson repatriated profits. Under previous laws, companies had topay a combined 40 percent tax on overseas earnings. The firsthalf of Japan’s fiscal year ends Sept. 30.
“Yen repatriation by Japanese firms is likely to continuetoday and next week,” said Masanobu Ishikawa, general managerof foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’slargest currency broker. “The bias is for the yen to rise.”
Export Slump
Japanese exports fell 36 percent in August from a yearearlier, the Finance Ministry said yesterday, an 11th-straightdecline. The drop was exacerbated by the yen’s 17 percent surgeagainst the dollar in the past year, making Japanese goods moreexpensive abroad and lowering the value of repatriated earnings.
“We’re affected by exchange rates, there’s no doubt aboutit,” said Paul Nolasco, a Tokyo-based spokesman at Toyota,which based its earnings estimates on the assumption that theyen will trade at an average of 92 to the dollar in the next sixmonths. The automaker forecasts a 450 billion yen ($5 billion)net loss for the year ending March 2010.
Large manufacturers expected the yen to trade at an averageof 94.85 per dollar in the 12 months to March 2010, according tothe Bank of Japan’s quarterly Tankan survey released July 1.
To contact the reporters on this story:Yasuhiko Seki in Tokyo at yseki5@bloomberg.net;Ron Harui in Singapore at rharui@bloomerg.net.
Last Updated: September 24, 2009 23:21 EDTSource: Bloomberg
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