Money and Metals

MarketWatch has this currency news. "The dollar rose against the euro, but fell to a two-week low against the yen Tuesday, as traders continued to trim bets against the Japanese currency following the better-than-expected capital spending figures. 'The main theme at the start of this week has been the unwinding of yen funded carry trades,' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman."

"In addition, 'speculative yen shorts have been extended for some time, which has provided conditions for a potential yen correction,' he said."

"Japan's Ministry of Finance said Monday that capital spending by Japanese corporations jumped 16.6% in the April-to-June quarter from a year ago. 'The news instantly revived speculation that BoJ may be forced to raise rates higher before the year end in order to contain the robust investment growth in the Japanese corporate sector,' said Boris Schlossberg, senior currency strategist at FXCM."

From Reuters. "Gold jumped more than 2 percent on Tuesday as traders returned from the final long weekend of summer in a mood to buy precious metals, shrugging off falling oil prices and mixed signals from the dollar. 'I'm thinking there is some money coming out of the energies and coming into metals,' said a floor broker."

"Silver took a leading role overnight, but gold sprinted ahead at the open on the COMEX division of the New York Mercantile Exchange. Commodity funds were buyers, seemingly chomping at the bit after weeks of sideways trading for gold."

"December gold rose $14.30, or 2.3 percent, to $646.90 an ounce, trading to a 25-day high at $648.50 from $631.60, the bottom overnight. 'There was some talk that India and the Far East have been active participants in the cash market, particularly in gold,' said James Quinn, commodities commentator at A.G. Edwards. 'The gold market hit some stops this morning above the $636 level and we haven't looked back since.'"

"Floor brokers were watching $649/$650 as major resistance for the benchmark contract."

"'It is quite a sharp jump when you consider oil is well entrenched below $70 and the U.S. dollar at $1.28 against euro is relatively strong,' said Bernard Hunter, a director of precious metals trading at ScotiaMocatta in Toronto. 'Gold's reaction is probably breaking away from those traditional indicators.'"

"December silver settled up 7 cents at $13.14, trading from $13.0350 to $13.37, its best price since May 30. Silver outperformed gold in recent weeks, rising about 36 percent in value since mid-June. Gold climbed around 16 percent in the same period."

"IMF Managing Director Rodrigo Rato told a news conference that increased IMF surveillance of currency policies in fast-growing emerging economies needed to ensure those policies were not used as an instrument to distort the global economy."

"Without naming countries, Rato said the IMF was advising some governments to move to greater exchange rate flexibility and to strengthen monetary policy to make their economies more resilient and better able to respond to inflation pressures. Speaking ahead of meetings of the IMF and World Bank in Singapore on Sept. 19-20, Rato said the IMF had also pointed out that flexible currencies could be incorrectly valued. In July, the IMF said the U.S. dollar was overvalued by between 15 and 35 percent."

"'It is not only there is a problem of efficiency and proper value in not totally flexible exchange rates, there are also problems of that in flexible exchange rates,' he added. 'The risk of inflationary pressures, (that have not yet) materialized in a strong way, is certainly a key question for monetary authorities worldwide,' he said."

"Washington Mutual Inc.'s issuance of bonds covered by U.S. mortgages in European credit markets, and potential follow-on activity by other U.S. financial institutions, carries risk should the dollar fall as expected, Merrill Lynch & Co. market strategist Richard Bernstein said in a note."

"WaMu on Monday became the first U.S. bank to issue 20 billion euros worth of so-called covered bonds in Europe. The move, should it prove successful, could encourage other U.S. issuers to tap the European market for covered bonds, which has so far been dominated by German and Spanish issuers, the Financial Times said."

"Covered bonds are considered more secure than mortgage-backed securities, or MBSs, because the purchasers of the bonds have a direct claim on the issuer's balance sheet. Partly for this reason, the costs of issuing covered bonds, especially in Europe, are less than issuing MBSs. In addition, the U.S. housing market has been stumbling faster than expected and issuing MBSs may not be as easy, or as advantageously priced, as before."

"But Bernstein said he sees the move as a risky bet because he expects the dollar to fall, which would raise the issuer's costs to service euro-denominated debt.
The Merrill strategist pointed out that the global economic imbalances stemming from excessive debt in the U.S., namely the current account deficit, have to be corrected by either higher U.S. taxes, higher short-term rates, and/or a lower dollar.
As the first two possibilities seem to be out, policy makers are increasingly relying on a lower dollar, he said."