January 25, 2010

Top Stories: Currencies

Jan. 25 (Bloomberg) -- The following are the day's top stories
on currencies:

Yen Declines on Speculation Bank of Japan is Prepared to Enact More
The yen fell against the dollar and the euro amid
speculation Bank of Japan policy makers are prepared to
increase purchases of government debt to safeguard the recovery
and limit the currency's strength. Japan's currency snapped
seven days of gains against the euro after people with
knowledge of the matter said the central bank may also expand
an emergency-loan program for banks as it seeks to stave off
deflation. The yen and the dollar dropped against
higher-yielding currencies on speculation Federal Reserve
Chairman Ben S. Bernanke will win lawmakers' support for a
second term. The dollar declined before a report that may show
sales of existing U.S. homes dropped last month. ``There's
still this whole debate about whether Japan will accept a
strong yen and I think it won't,'' said Sonja Marten, a
currency strategist at DZ Bank AG in Frankfurt. ``They will
intervene if they feel the yen starts to accelerate too much.''
The yen depreciated to 127.39 per euro at 8:26 a.m. in London
from 126.98 in New York last week. It weakened to 90.06 per
dollar, from 89.82. It traded at 89.79 on Jan. 22, its
strongest level since Dec. 18. The dollar was at $1.4141 per
euro from $1.4139, after appreciating to $1.4029 on Jan. 21,
its best level since July.

China May Raise Value of Yuan 5% in One-Time Move, Goldman's O'Neill
China will probably let its currency appreciate by at least
5 percent in a one-time move and raise interest rates to cool
the economy and curb inflationary pressures, Goldman Sachs
Group Inc. Chief Economist Jim O'Neill said. The Chinese
government may allow the yuan to have ``a bigger one-off move
than people talk about, at least 5 percent, maybe more,''
O'Neill said in an interview today at the London School of
Economics. ``They may also consider having a wide band to let
it move more frequently on the daily basis to stop speculative
players.'' China's economy rebounded stronger than anticipated
in the fourth quarter, and the inflation rate accelerated to a
13-month high of 1.9 percent in December, igniting speculation
the government will abandon the yuan peg to avoid the economy
from overheating. China has kept a lid on its currency since
July 2008 after it strengthened 21 percent against the dollar
over the previous three years. ``Part of the idea of doing
these things is to surprise people so we are not going to get
any hints of it happening,'' said O'Neill. ``We'll just wake up
on an unpredictable day and see it happen.''

Pound Perceived as Diminished Currency No Matter Who Wins in U.K.
No matter who prevails in this year's election between U.K.
Prime Minister Gordon Brown and opposition leader David
Cameron, the loser will be the pound because the next
government may not have enough support in parliament to rein in
the Group of 20's biggest budget deficit. Strategists cut
forecasts on sterling versus the dollar by as much as 2 percent
this month to the lowest since June. The currency will be
weighed down by polls that point to the first parliamentary
stalemate in a generation, growth that lags behind the four
biggest industrialized economies and a fiscal shortfall that
has ballooned to almost 13 percent of gross domestic product,
double what it was a year ago, the strategists said. SJS
Markets Ltd., last year's second-most accurate forecaster on
the pound versus the dollar, sees the U.K. currency falling 1.3
percent by Dec. 31. BNP Paribas SA says the pound will wipe out
all of last year's 11 percent gain, its best since 2006. The
last time a U.K. election failed to produce a clear winner was
in 1974. The currency fell 28 percent in the next two years as
the government's failure to fund its deficit led to an
International Monetary Fund bailout. ``If you end up with
political paralysis in the U.K., that would be the worst of
both worlds, where no one governs and everybody is fighting
each other,'' said Sebastien Galy, a New York-based senior
foreign-exchange strategist at BNP, which sees the pound
sinking to $1.40 this year. ``It's not a happy time when you
have to go through fiscal restraint as it makes nobody happy,
and if you do it with a weak majority or weak type of
coalition, it's not easy to sustain.''

Argentine Peso Rally Ending as Fernandez Seeks Cash, Morgan Stanley Says
The four-month rally in the Argentine peso is poised to end
because the government will seek a weaker exchange rate to
boost payments of profits from central bank foreign reserves,
Morgan Stanley said. The devaluation incentive will lead the
bank to break the longest peso rally since early 2007 and push
the currency down 9.5 percent to 4.2 per dollar by year-end,
said Daniel Volberg, a Morgan Stanley economist in New York. A
drop that big would increase the peso value of the nation's $48
billion of international currency reserves and result in about
$5 billion being handed over to the government, he said. ``That
would significantly boost Argentina's financing,'' Volberg said
in a telephone interview. Argentina's financing needs will
climb to $11.4 billion this year from $10.7 billion in 2009,
according to estimates by Credit Suisse Group AG. President
Cristina Fernandez de Kirchner is seeking to restructure $20
billion of defaulted debt that creditors held out of a 2005
restructuring in a bid to regain access to international
markets. To help finance payments, she also proposed taking
$6.6 billion of central bank reserves, a plan that central bank
President Martin Redrado has opposed.

Brazil's Real May Gain Versus Yen on Rate Increase, Mitsubishi UFJ Says
Brazil's real may strengthen against the yen and dollar as
a V-shaped recovery in the nation's economy this year prompts
the central bank to raise interest rates, according to
Mitsubishi UFJ Securities. Brazil's central bank will increase
its benchmark interest rate from 8.75 percent as growth is
likely to ``accelerate to the mid-5 percent level this year
from a little over 0 percent in 2009,'' Hiroyuki Omiya, a New
York-based executive director at Mitsubishi UFJ Securities,
said in an interview in Tokyo last week. ``Brazil has a phobia
of inflation due to its deep-seated memories of
hyperinflation,'' Omiya said. The central bank should reverse
half of the 5 percentage points in rate cuts it enacted during
the financial crisis, he said. Brazil's inflation is currently
below the government's target range of 4.5 percent plus or
minus 2 percentage points. The real advanced against all of its
16 major counterparts in 2009, climbing 33 percent against the
dollar and gaining 36 percent versus the yen, according to
Bloomberg data. ``We are getting more inquiries from Japanese
investors about real-based exchange rates,'' Omiya said.

Economy in U.S. Probably Expanded by Most in Four Years on Factory
The U.S. economy probably grew in the closing months of
2009 at the fastest pace in almost four years as factories
stepped up production and companies purchased new equipment,
economists said before reports this week. Gross domestic
product expanded at a 4.6 percent pace from October through
December, more than double the prior quarter's growth rate and
the strongest since the first three months of 2006, according
to the median estimate of 74 economists surveyed by Bloomberg
News. Other reports may show orders for durable goods increased
and home sales declined. Manufacturers such as Intel Corp. are
leading the recovery as growing demand and dwindling
inventories prompt companies to speed up assembly lines. Slower
consumer spending after the third-quarter's ``cash for
clunkers'' rebound is a reminder that 10 percent unemployment
is causing Americans to hold back, one reason why the Federal
Reserve may keep interest rates low. ``Inventories are going to
be responsible for at least half of the growth, if not more,''
said Joshua Shapiro, chief U.S. economist at Maria Fiorini
Ramirez Inc. in New York. ``There's been an enormous amount of
government stimulus that will be fading as we go through the
year, so it's unclear how much the economy can do on its own.''

Canadian Currency Touches Weakest Level in a Month as Risk Appetite
The Canadian currency weakened the most since October as
uncertainty over U.S. banking regulations, China's monetary
policy and Greece's finances dulled investors' appetite for
higher-yielding assets. Canada's dollar fell against most of
its major counterparts as stocks tumbled and crude oil, the
nation's biggest export, dropped. The Bank of Canada kept
interest rates at a record low and repeated concern that the
currency's strength is hampering the nation's economy. Gross
domestic product grew in November for a third month, a report
is forecast to show next week. ``Quite simply, the market was
extremely long Canada,'' said Michael O'Neill, managing
director at Knightsbridge Foreign Exchange Inc. in Toronto. A
long position is a bet a currency will appreciate. ``The fact
there was a bit of risk aversion coming back into the market
because of the Obama tax on banks, plus
will-China-keep-tightening, that all put Canada in a bit of a
negative light.'' The Canadian currency, nicknamed the loonie,
depreciated 2.7 percent, the most since the five days ended
Oct. 30, to C$1.0578 per U.S. dollar yesterday in Toronto,
compared with C$1.0291 on Jan. 15. It gained 16 percent last
year. One Canadian dollar buys 94.54 U.S. cents.

Peru's 30% Currency Futures Tax on Foreigners to Dry Up Trading, RBS
Peru's tax on foreign investors' profits from short-term
currency futures will dry up trading in the sol, RBS Securities
Inc. said. The 30 percent tax on contracts maturing up to 60
days, which takes effect today, is part of changes to a decree
issued last month that included a capital gains tax on stocks.
``This new legislation will be negative in as much as it dries
up market activity and directs interest away towards currencies
that still enjoy less interference,'' Flavia Cattan- Naslausky,
a currency strategist at RBS in Stamford, Connecticut, wrote in
a report today. The sol dropped 0.1 percent to 2.8525 per
dollar at 3:50 p.m. New York time from 2.8495 yesterday. The
currency has strengthened 1.2 percent this year after an 8.5
percent jump last year, its biggest annual advance since its
creation in the 1990s. RBS forecasts the sol will slide to 2.9
by year-end.

ECB Has `Steady Hand' Approach on Liquidity Withdrawal, Nowotny Tells
The European Central Bank will operate a ``steady-hand
approach'' in its move to gradually withdraw extraordinary
liquidity measures, and there is no need for banks to be
nervous, European Central Bank Governing Council member Ewald
Nowotny said in an interview with the Financial Times. The ECB
sees neither ``an inflation or deflation perspective,'' and the
central bank doesn't see ``a risk of bubbles emerging in the
eurozone,'' he said. A pick-up in western European export
markets is helping central and eastern European economies to
recover faster than expected and some may profit in an
``over-proportional way'' due to their competitive advantages,
he said, the FT reported.

South African Central bank Set to Keep Interest Rates on Hold: This Week
South Africa's central bank will probably leave its
benchmark interest rate unchanged tomorrow as a recovery in
Africa's largest economy gathers pace and inflationary
pressures abate. The bank will keep the rate at 7 percent,
according to 20 of 22 economists surveyed by Bloomberg. The
decision will be announced soon after 3 p.m. in Pretoria. The
Reserve Bank reduced the key rate by 5 percentage points in the
nine months through August after the economy fell into its
first recession in 17 years. Growth resumed in the three months
through September, with gross domestic product expanding an
annualized 0.9 percent as manufacturing recovered. ``The
central bank probably feels it has responded enough'' to the
recession, said Kevin Lings, an economist at Stanlib Asset
Management in Johannesburg. ``We are already at the bottom of
the interest rate cycle.''

Russian Ruble Weakens to 2010 Low Against Dollar as Oil Falls Below $75
The ruble declined to its weakest level against the dollar
this year and fell the most in almost a month versus the euro
as oil, Russia's biggest export, traded below $75 a barrel. The
Russian currency depreciated 0.9 percent to 30.1398 per dollar
by 10:29 a.m. in Moscow, the weakest since Dec. 30. It fell 1.1
percent, the biggest drop since Dec. 29, to 42.6350 per euro.
Oil traded near a one-month low as expectations of
interest-rate increases in China dented investor confidence in
the strength of the global economic recovery. Crude for March
delivery was little changed at $74.57 in New York after
dropping 2 percent on Jan. 22, the lowest settlement since Dec.
22. The movements against the dollar and the euro left the
ruble at 35.7898 against the central bank's target currency
basket, which is used to manage swings that hurt Russian

Hungary to Pace Interest Rate Cuts to Ward Off Forint Risk, Survey Shows
Hungary's central bank may slow the pace of interest rate
cuts this year as the European Union's most indebted eastern
member balances policy to address currency risks against the
deepest recession in almost two decades. The Magyar Nemzeti
Bank will lower the benchmark two-week deposit rate three
quarters of a point to 5.5 percent by the second quarter,
according to the median estimate of 10 economists in a
Bloomberg survey. Policy makers will cut the rate a quarter
point to a record low 6 percent at today's meeting, 16 of 19
economists said in a separate survey estimate. Three expect a
half-point reduction. Hungary is emerging from its worst
economic crisis in 18 years, which culminated in a 7.5 percent
annual contraction in the second quarter and forced the country
to turn to international donors for a $30 billion loan. At the
same time, government debt will this year swell to 79.8 percent
of gross domestic product, more than double that in neighboring
Romania and Slovakia, restricting the scope for interest rate
cuts as investors demand higher returns to compensate for
credit risks. ``This has been a quite aggressive rate-cut
cycle,'' Bartosz Pawlowski, an emerging-market strategist at
BNP Paribas SA in London, said in a telephone interview. ``What
the central bank is doing is a fine balancing act between what
the economy calls for and what investors require in risk
premium due to the country's very high level of indebtedness.''

Australian, New Zealand Dollars Gain on Speculation Bernanke to Keep Job
Australia and New Zealand's dollars gained the most in
about three weeks versus the yen as demand for riskier assets
rose on speculation Federal Reserve Chairman Ben S. Bernanke
will be confirmed for a second term. The so-called Aussie also
rose before a Jan. 27 report economists said will show annual
inflation accelerated in the fourth quarter, boosting prospects
the central bank will raise interest rates next month. U.S.
President Barack Obama received assurances from Senate leaders
that Bernanke will be confirmed, an administration official
said. ``Risk has bounced a little on Bernanke's potential
reappointment looking more likely,'' said Tony Allen, head of
currency trading at ANZ National Bank Ltd. in Wellington.
Australia's currency rose 1 percent, the most since Jan. 6, to
81.70 yen as of 3:51 p.m. in Sydney. It gained 0.7 percent to
90.68 U.S. cents from New York's closing level on Jan. 22. New
Zealand's dollar climbed 1.2 percent, the most since Dec. 29,
to 64.50 yen. It added 0.9 percent to 71.59 U.S. cents.

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