The Japanese yen soared versus a basket of currencies on Wednesday as lingering concerns about the nascent recovery prompted investors to undo bets against the Japanese currency. In addition, worries about a recovery resurfaced with political turbulence in China led investors to question whether Chinese economic growth will be able to take over that of U.S. to be a driver of the global economy. Part of the recent optimism over an economic recovery was based on the assumption that China would be be locomotive of growth and keep the rebound going. In early New York afternoon trade, dollar slid to as low as 91.80 against the yen and carry trades were under significant pressure with eur/jpy dropping from 132.10 to 127.00, while aud/jpy declined from 74.86 to 70.96 and gbp/jpy tumbled from 152.93 to 146.81 before rebounding later in the day.
Dollar strengthened across the broad on increased risk aversion, adding momentum after G-8 leaders did not discuss the dollar’s role as the reserve currency on Wednesday. Furthermore, the news that Chinese President Hu Jintao was returning home to deal with unrest in the western region of Xinjiang dampened speculation that any currency comment would be added from him. Although euro rose to as high as 1.3939 against the greenback after Germany posted a much better-than-expected industrial production data (3.7% in May versus economists forecasts of 0.5%), the single currency fell sharply to 1.3832 in New York afternoon before rebounding as DJI pared all its early losses (76 points) and ended up 14.81 points. The European Central Bank said that the euro has maintained its share in financial markets over the worst of the crisis but warned marking loans in euros in eastern Europe could backfire on both borrowers and banks.
In European morning, the British pound hit an intra-day high of 1.6140 against the U.S. currency. U.K. Halifax house price data came out slightly better than expected (falling by 0.5% in June compared to economists’ forecast of a 0.7% decrease). In addition, former Bank of England policy maker, Stephen Nickell, said that the property market may be slow to recover. Sterling slipped to as low as 1.5983 due to cross selling versus yen before recovering in late New York trade.
International Monetary Fund said on Wednesday that the global economy is starting to pull out of recession but the recovery will be sluggish. Its forecast for the world economic growth in 2010 would be 2.5% compared to an April projection of 1.9%. IMF also stated that the risks to the global financial system have moderated sine April but it is too soon for governments to withdraw stimulus and support.
Data to be released on Thursday include Australia unemployment rate and employment change, Japan machine tools orders, German current account, trade balance, CPI, U.K. trade balance, Canada housing starts, U.S. weekly jobless claims. BOE will announce rate decision at 11:00GMT and keeping interest rates unchanged at 0.50% is widely expected.