Yen, Dollar Weaken as China's Industrial Output Beats Forecast; Euro Gains
Yen, Dollar Weaken as China’s Output Beats Forecast
Tomohiro Ohsumi/Bloomberg
Japan’s currency declined for a fourth day against the Australian dollar and dropped the most in a week versus the euro as the Chinese data added to signs global growth is gaining momentum.
Japan’s currency declined for a fourth day against the Australian dollar and dropped the most in a week versus the euro as the Chinese data added to signs global growth is gaining momentum. Photographer: Tomohiro Ohsumi/Bloomberg
The yen weakened against most major counterparts and the dollar fell as regulators gave banks years to comply with new capital rules and Chinese data showed sustained economic expansion, sapping demand for safer assets.
Japan’s currency fell for a fourth day versus Australia’s dollar as higher-than-forecast Chinese retail sales added to signs the global recovery is gaining momentum. China’s yuan reached a record as the data also showed faster inflation. The euro rose for the first day in three against the dollar as the Basel Committee on Banking Supervision gave lenders as long as eight years to comply with higher capital requirements intended to prevent future crises.
“Basel is being perceived as not as negative as was feared last week, so you’re getting a relief rally that’s boosting the euro at the expense of the dollar and the yen,” said Jeremy Stretch, global head of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit in London. “The data at the weekend was consistent with the view that China can continue to drive the global recovery story.”
The yen weakened 0.9 percent to 107.69 per euro as of 6:53 a.m. in New York, the biggest one-day loss since Sept. 1. It was 0.1 percent stronger at 84.06 per dollar. The shared European currency jumped 1.1 percent against the dollar to $1.2813.
China Production
China’s industrial production grew 13.9 percent in August from a year earlier, the biggest gain since May, the statistics bureau said in Beijing on Sept. 11. Retail sales increased 18.4 percent in August, surpassing the 18 percent prediction in a Bloomberg News survey. Consumer prices jumped 3.5 percent, the most in 22 months.
“The relevance of Chinese data for the performance of the euro should not be underestimated as China has become the euro region’s most important trading partner, with 22 percent of all German exports going into China,” BNP Paribas SA currency strategists led by Hans-Guenter Redeker in London wrote in a research report today. “China’s import strength is good news for export-oriented core European countries, providing one of the reasons why euro-dollar rallied.”
Evidence of strengthening domestic spending and accelerating inflation backs the case for China to take more steps to cool possible overheating of the economy. Policy makers may already be responding, as the central bank fixed the yuan reference rate at its strongest in more than five years.
The yuan strengthened as much as 0.3 percent to a record 6.7510 per dollar before trading at 6.7618 from 6.7692 last week. The People’s Bank of China set the reference rate at 6.7509 yuan to the greenback today, the highest since the peg was scrapped in July 2005. The currency is allowed to move 0.5 percent on either side of the reference rate.
‘Significantly Higher’
“Part of the explanation for the firmer currency was the robust economic data released over the weekend,” FXPro Financial Services Ltd. strategists led by Simon Smith in London wrote in a research report today.
The Chinese government may also have let the currency appreciate to assuage U.S. lawmakers this week, Smith wrote. The House Ways and Means Committee is scheduled to hold a hearing Sept. 15 on China’s exchange rate.
The yen and dollar also weakened before a U.S. Commerce Department report tomorrow that economists said will show retail sales gained 0.3 percent in August. That would follow a 0.4 percent increase in July.
South Korea’s won led Asian currencies higher as the MSCI Asia Pacific Index gained for a third day, adding 1.4 percent. The won advanced 0.4 percent to 1,160.68 per dollar, and India’s rupee strengthened 0.3 percent to 46.36.
Euro Gains
The euro gained against 14 of its 16 major counterparts on speculation the new regulations from the Basel Committee, reaching a compromise as they seek to rein in the risk-taking that caused the financial crisis, will give European banks ample time to raise additional funds.
The revised rules require lenders to have common equity equal to at least 4.5 percent of assets, weighted according to their risk. Regulators will introduce an additional capital buffer of 2.5 percent to withstand future stress, the committee said in a statement yesterday. Banks that fail to meet that second buffer would be stopped from paying dividends, though not forced to raise cash.
“They’ve got a long time for the banks that don’t have sufficient capital to get their house in order,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “The euro is getting a good boost. Certainly that’s a good sign.”
‘Ugly Contest’
The euro may be unable to sustain its gains against the dollar as renewed concern over the solvency of nations from Portugal to Ireland points to another slump for the common European currency.
Hedge funds and other large speculators have increased bets on a weakening of the euro to the highest level in almost two months, according to data from the Commodity Futures Trading Commission. Investors are paying close to the most in three months to insure against losses on Greek and Spanish bonds, while yields on Irish and Portuguese government debt surged to records relative to benchmark German bunds last week.
“Both the euro and the dollar are weak currencies, but the euro-region’s problems are more difficult to solve than those in the U.S.,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s an ugly contest and the euro’s going to win.”
Shadow Shogun
The yen also weakened before an election tomorrow that will determine the leader of the ruling Democratic Party of Japan. Prime Minister Naoto Kan will be challenged at the vote by Ichiro Ozawa, dubbed the “Shadow Shogun” for a 40-year career spanning five political parties. Whoever wins will have to work to mend party divisions, with both men rejecting any idea that the DPJ will split after the election.
“Dollar-yen may be firm and could strengthen toward 85 should Japan’s political situation stabilize,” said Masafumi Yamamoto, chief currency strategist at Barclays Bank Plc in Tokyo. “In addition, medium- to long-term yield differentials between the U.S. and Japan have widened, so there’s a reduced risk for a weaker dollar and a stronger yen.”
The extra yield offered by 10-year Treasuries over similar- maturity Japanese government bonds widened to 1.68 percentage points from 1.63 points on Sept. 10.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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