Monday, February 12, 2007


Yen A Threat To The Global Economy?

Bloomberg reports on the gold market. "Gold prices in New York fell from a six-month high after the dollar strengthened, reducing the precious metal's appeal as an alternative investment. The U.S. dollar rose against 15 of 16 major currencies tracked by Bloomberg. Gold futures for April delivery fell $5, or 0.7 percent, to $667.30 an ounce on the Comex division of the New York Mercantile Exchange. Prices climbed 3.2 percent last week to the highest since August."

"Gold also fell as a drop in energy costs reduced the metal's appeal as a hedge against inflation. Crude-oil prices tumbled as much as 4.2 percent to below $58 a barrel after Saudi Arabia told Asian refiners to expect more shipments next month. Oil reached $60.80 on Feb. 9, the highest since Jan. 3."

"'The combination of the dollar being up and a decent decline in oil puts pressure on gold,' said Tom Hartmann, a commodity broker at Altavest Worldwide Trading Inc. in Mission Viejo, California. 'If oil weren't down as much, gold would be seeing more support.'"

The "Gold prices took a dip Monday as the greenback rallied in anticipation of bullish comments by Federal Reserve Chairman Ben Bernanke later this week. April-dated contracts eased $5 to close at $667.30 an ounce on the Comex."

"The bullion ETFs that hold inventories of gold, iShares Comex Gold Trust and streetTracks Gold Shares, were down 0.8% and 0.7%, respectively."

"'The market is expecting a more hawkish tone from Federal Reserve Chairman Ben Bernanke, opening the door to monetary tightening,' says Alan Gayle, senior investment strategist at Trusco Capital Management, in Richmond, Va."

"Gayle notes that late last year, a disconnect existed between the bond market, which saw future weakness in the U.S. economy, and the Fed, which seemed to see strength ahead. During January, fixed-income investors fell more in line with the stated view of Fed board members."

"A robust economy would likely steer policymakers toward hiking interest rates, which would in turn help support the greenback."

"The yen rose from a record low against the euro after finance ministers and central bankers from the Group of Seven nations warned against making 'one-way bets' versus the Japanese currency."

"Japan's yen also gained against the Australian dollar and Swiss franc and pared its losses versus the U.S. dollar as European Central Bank President Jean-Claude Trichet said Feb. 10 the trades are 'not appropriate,' after a two-day G-7 meeting in Germany. The yen initially dropped after G-7 officials stopped short of saying its weakness is a threat to the global economy."

"'It will be a day of reckoning when the trade gets unraveled,' said Tim O'Sullivan, chief foreign exchange trader at, a unit of online currency trading company Gain Capital in Bedminster, New Jersey, which has about $250 million worth of funds under management. 'The G-7 officials are certainly not comfortable with that. This triggered the yen to move higher.'"

"The yen traded at 121.78 per dollar from 121.71 on Feb. 9, after earlier dropping to an intra-day low of 122.10, close to the weakest in more than four years at 122.19 on Jan. 29."

"Gains in the yen may be limited as European officials at the G-7 meeting failed to persuade the U.S. and Japan to call for it to strengthen. G-7 officials, in a communiqué released at the close of their meeting on Feb. 10, urged investors to recognize that Japan's economic recovery is 'on track.' The statement didn't refer to the yen."

"The G-7 meeting's outcome is 'negative for the yen,' said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London. 'We expect the yen to come under pressure and it will continue to underperform.'"

"The yen has declined 4.5 percent versus the dollar in the past six months and 6.2 percent versus the euro as investors borrow cheaply in Japan and exchange funds for higher-yielding assets abroad, in a practice known as the carry trade."

From Andy Mukherjee. "If Vietnam ends up imposing Thai- style capital controls, as some Asia analysts expect, the world's richest nations must take some of the blame. In its statement last weekend, the Group of Seven industrialized nations had a real chance to exert some pressure on the Bank of Japan by saying just how big a threat the super- cheap Japanese currency was to the world economy."

"Its silence drove the yen lower against the euro and the U.S. dollar yesterday, making financial stability an even more uphill task for countries such as Vietnam that are struggling to keep their heads above the deluge of cheap money."

"Vietnam would probably not be losing the fight against inflation if global liquidity were correctly priced, which it might have been without Japan making it possible for hedge funds to borrow at half a percent for three months."

"With inflation running at about 7 percent in 2006, the State Bank of Vietnam didn't raise interest rates last year. 'This partly reflected concerns over the costs of funding the central bank's U.S. dollar purchases in its bid to nudge the Vietnamese dong exchange rate lower, even as foreign flows into its stock markets accelerated,' S&P analyst Tan Kim Eng wrote."

"The Ho Chi Minh City bourse's VN Index, which has more than tripled over the past year, has been the world's best-performing benchmark in U.S. dollar terms in that period."

"It's facile to argue that Vietnam's central bank should have used higher interest rates to contain inflation. That would have exerted further pressure on the dong to strengthen. And appreciation in the home currency, if allowed by the central bank, would have further whetted foreign investors' appetites by giving them a higher return on their dollar investments."

"Thailand made this mistake. It raised interest rates to tame inflation and ended up getting more inflows from overseas. After the baht rose 16 percent in less than a year, threatening to stall exports, the Bank of Thailand panicked and imposed capital controls in December."

"'Central bankers in the developing world do not control the price of money in the developed world,' says V. Anantha- Nageswaran, head of research for Asia and the Middle East at Julius Baer Holding AG. 'Hence, paradoxically, the more they raise interest rates, the more attractive they become.'"

"In separate reports, analysts at Australia & New Zealand Banking Group and JPMorgan Chase & Co. last week raised the specter of capital controls in Vietnam. The restrictions, it is being speculated, would mirror the botched Thai move, which required foreign investors to pay a penalty for withdrawing funds before a year."

"It isn't just emerging markets that are reeling from cheap global money. New Zealand Finance Minister Michael Cullen's comment last week about a mortgage levy shows the frustration. A tax on home loans, a proposal that Cullen said was at a 'a very preliminary stage' of consideration, will make borrowing more expensive and cool the overheated property market."

"Trying to achieve the same objective through a conventional interest-rate increase will only end up making the New Zealand dollar more attractive to the carry traders, who would leap to buy the nation's currency by borrowing in yen."

"According to my Bloomberg, borrowing in yen to buy the New Zealand dollar has, over the past six months, given investors an annualized return of -- hold your breath -- 38 percent in U.S. dollar terms at a very favorable reward-to-risk ratio."

"'In a world where capital moves more freely than ever before and carry trades are increasingly popular, it perhaps makes sense that policy makers will have to start using targeted measures as opposed to general rate hikes,' says Shahab Jalinoos, Singapore-based head of Asian currency strategy at ABN Amro Bank NV."

"From South Korea to India and China, authorities are becoming aware that they must use tools other than interest-rate increases to meet their monetary-policy objectives. If emerging markets succeed in their endeavor, there may be a little less incentive for carry trades, Jalinoos says."

"And what if they fail? 'By the end of the year or next, capital controls would be fashionable,' says Julius Baer's Anantha-Nageswaran."

"The G-7 should have named the weak yen for what it is: a threat to the global economy."

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