Monday in Asia, the yen rose to its highest level in almost 4-weeks against the dollar after Lawrence Summers said the U.S. economy will keep shrinking and as the spread of swine flu boosted demand for Japan's currency as a refuge from the recession. The yen also jumped to multi-day highs against the currencies of Europe, U.K., Australia and New Zealand.
Lawrence Summers, director of the White House National Economic Council, in Fox News Sunday stated that he suspects that the U.S. economy will continue to decline for some time to come. Summers also said that it was clear that there were going to be sharp declines in employment for quite some time this year.
The International Monetary Fund, which held meeting last week in Washington, cut its forecast for each of the Group of Seven economies for this year and next year. The IMF, established in 1944 to aid countries in financial crisis, said the U.S. economy would shrink 2.8 percent this year and have no growth in 2010, with unemployment rising to 10.1 percent.
The yen and the dollar rose today and the Mexican peso fell on concern about the spread of swine flu, which has killed 103 people in Mexico and infected people in the United States and Canada.
The World Health Organisation declared the flu a public health emergency of international concern that could become a global outbreak of serious disease.
The Mexican peso fell 2 percent against the dollar in Asian trade, although Mexican Finance Minister Agustin Carstens tried to reassure markets, saying the impact on economy would be transitory.
High-yielding currencies such as Australian and New Zealand dollars weakened as the worldwide number of cases of swine flu increased, leading to concern tourism will slump.
Today, the Cabinet Office of Japan lowered the economic forecast for the fiscal year 2009, as the country's exports continued to shrink much more than expectations. The government now expects the economy to contract 3.3% in 2009, after the initial estimate of a zero growth made in December. The decline is also far worse than the 1.5% contraction recorded in the economy during the fiscal year of 1998.
The International Monetary Fund said last week that Japan's economy will shrink 6.2 percent in 2009, the worst among advanced economies, compared with its January projection of a 2.6 percent contraction.
The yen rose to a 4-week high of 96.54 against the dollar during Asian deals on Monday. The next upside target level for the yen is seen at 93.6. At last week's close, the dollar-yen pair was quoted at 97.20.
The yen surged up to a 13-year high of 87.13 on January 21. However, the yen pared its gains thereafter and lost 14% to hit a 5-1/2 -month low of 101.46 on April 06.
The Bank of Japan's decision to broaden the range of eligible collateral for loans on deeds to the government and those with government guarantees helped the yen to bounce back from a 5 1/2 -month low.
On April 07, the Policy Board of the central bank unanimously voted to hold the uncollateralized overnight call rate at 0.1%. The decision came in line with economists' expectations. The previous change in interest rates was a 20 basis point cut implemented in December 2008.
While announcing the rate decision, the central bank said it will accept loans on deeds to municipal governments as eligible collateral and also broadened the range of eligible collateral for loans on deeds to the government and those with government guarantees.
Despite improvements in issuing conditions for CP and corporate bonds, the BoJ noted that financial conditions remained tight. The BoJ's decision to expand the range of eligible collateral was made with an intention to ensure financial market stability.
The central bank resumed its purchase of stocks held by banks and is examining the specifics of providing subordinated loans to banks. Last month, the central bank raised its monthly government bond purchases.
Thus far, the yen has appreciated 5% against the U.S. currency. Much of the yen's gain came as the deteriorating global economy caused investors to flee stocks and emerging market bonds and reinvest their money in Treasuries.
In Asian deals on Monday, the yen strengthened to a 4-day high of 127.06 against the euro. This may be compared to Friday's close of 128.66. On the upside, 126.2 is seen as the next target level for the Japanese currency.
The euro fell on concern the European Central Bank will lower its policy interest rate at its next policy meeting on May 7.
ECB President Jean-Claude Trichet may signal he will lower rates further when he speaks today at a conference on trends in global finance at the New York Federal Reserve Bank. Vitor Constancio, a member of the ECB governing council, speaks at a conference on corporate governance and consumer interests in Lisbon.
The euro jumped to a 4-day high of 129.30 against the yen on Friday as a better-than-expected German data provided further evidence that the pace of economic downturn will slow in Europe's largest economy.
The Munich-based Ifo Institute for Economic Research said its business climate index rose to 83.7 in April from 82.2 in March. Meanwhile, economists had expected a slight increase to 82.3.
Against the pound, the yen climbed to a 5-day high of 140.81 in Asian trading on Monday. If the Japanese currency advances further, it may find resistance near the 135.8 level. The pound-yen pair was worth 142.53 at Friday's close.
The pound remained under heavy selling pressure after a report showed on Friday that the UK economy contracted more than expected in the first quarter of this year.
Data released by the Office for National Statistics or ONS on Friday showed that the gross domestic product declined 1.9% in the first quarter, while economists were looking for a milder figure of 1.5%. The deterioration worsened from the final quarter of 2008, when the economy had shrunk 1.6%.
The latest contraction is the biggest since the early days of the Margaret Thatcher government in 1979. The GDP number has been in the red since the third quarter of 2008. Further, it is reportedly the worst six-month decline in GDP since the start of official records.
Adding to pound's slide, a report by property consultants Hometrack said today that the house prices in the UK fell 0.3% month-on-month in April, by the slowest pace in a year. The report said the slower pace of decline in prices reflected a rise in optimism from estate agents due to increased levels of market activity. Year-on-year, house prices were down 10.1% in April.
During the month, sales volume grew 15%, while the number of potential buyers registering with estate agents rose 6%. Homestrack, at the same time, indicated that the recent pick up in sales was largely seasonal and was unlikely to be sustained over the rest of the year.
During Asian deals on Monday, the yen advanced to 84.42 against the Swiss franc. The near term resistance level for the Japanese currency is seen at 83.6. The franc-yen pair closed last week's trading at 85.27.
During Asian deals on Monday, the yen spiked to a 4-day high of 54.40 against the NZ dollar and a 5-day high of 68.63 against the Australian dollar. If the yen gains further, it may likely target 53.7 against the kiwi and 68.1 against the aussie. The aussie-yen and the kiwi-yen pairs were worth 70.32 and 55.71, respectively at last week's close.
The Australian and New Zealand dollars dropped amid speculation the spread of swine flu from Mexico will hurt tourism and deepen the global recession, spurring investors to sell riskier assets.
Benchmark interest rates are 3 percent in Australia and New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S. attracting investors to the South Pacific nations' higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
The New Zealand dollar weakened as economists estimate the nation's benchmark rate will be lowered on April 30 to 2.5 percent from 3 percent.
In Asian trading on Monday, the yen edged higher to 79.33 against the Canadian dollar. The next upside target level for the yen is seen at 78.7. At last week's close, the loonie-yen pair was quoted at 80.34.
The Canadian dollar slipped as the crude oil prices fell over 2 percent toward $50 a barrel in Asian deals on fears of a global flu. The impending release of U.S. bank stress test results, a Federal Reserve meeting and a flood of earnings due later this week also heightened investor caution.
U.S. crude oil futures for June delivery fell $1.08 to $50.47 a barrel, erasing some of Friday's gains of $1.93 that brought the contract to settle at $51.55. London Brent crude fell 77 cents to $50.90.
The Italian consumer confidence report for April is due in the upcoming hours.
There are no significant economic reports scheduled for release from U.S. today.
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