India Leaves Rates Unchanged on Inflation Concerns

India’s central bank kept borrowing costs unchanged, signaling an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October.
The Reserve Bank of India held its reverse repurchase rate at 3.25 percent, according to a statement in Mumbai today. The central bank raised its inflation forecast for the year to March 31 to “around 5 percent” from an April estimate of 4 percent, citing “elevated” food and commodity prices.
Inflation risks increased after Finance Minister Pranab Mukherjee this month unveiled plans to raise spending and widen the budget deficit to a 16-year high to bolster growth. Policy makers from Tokyo to London, who in some cases cut interest rates to close to zero, have started to discuss when they will exit from the emergency measures put in place to ease a global credit freeze.
“Central banks need to put in place now a timely, smooth and systematic exit from the monetary easing,” said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. “For India, it would be difficult to continue pursuing the current low-rate regime beyond six to nine months.”
Stocks narrowed losses after the central bank decision, which was expected by 20 of 23 economists in a survey. The Sensitive stock index fell 0.4 percent to 15,312.63 on the Bombay Stock Exchange at 11:20 a.m. The benchmark 10-year government bond yields rose 1 basis point to 6.96 percent while the rupee was little changed at 48.225 against the dollar.
Consumer Prices
India, which releases final inflation numbers after a two- month lag, raised its estimate for the benchmark wholesale price index in the week ended May 16 to 1.65 percent from 0.61 percent, indicating that price gains are gathering pace.
Consumer price indexes that measure the cost of living for industrial and farm workers were running at between 7 percent and 10 percent in May, driven by high food costs.
“The continuation of the monetary-fiscal stimuli is now hitting the danger zone,” S. S. Tarapore, a former deputy governor of the central bank, said in Mumbai on July 16. “Given the budget is strongly expansionary, the RBI has little option but to gradually withdraw the monetary accommodation.”
Mukherjee on July 6 announced plans to borrow a record 4.51 trillion rupees ($94 billion) to fund spending on roads, power and aid for the poor. The budget shortfall is forecast at 6.8 percent of GDP in the year to March 2010.
‘Immediate Challenge’
The central bank today estimated its policy measures since September including lower interest rates and a reduced cash reserve ratio were worth 6 trillion rupees. It said a prolonged budget deficit can “crowd out” private investments and trigger inflation, and urged the government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets.
The “immediate challenge” before the central bank is to provide ample cash in the banking system for companies and government borrowings to support growth, while at the same time control the “potential build-up of inflationary pressures on the way forward,” Subbarao said in today’s statement.
“In the din created in the name of growth, the RBI has to realize that if inflation accelerates, the blame will rest squarely on it,” Tarapore said.
The Organization for Economic Cooperation and Development said June 24 that GDP in its 30 industrialized member countries will increase 0.7 percent next year after shrinking 4.1 percent in 2009. The U.K. inflation rate will be the highest in the G-7 next year, OECD said.
Growth Forecast
Subbarao today also raised the central bank’s growth forecast for India in the year to March 2010 to 6 percent “with an upward bias” from the 6 percent estimated in April because of favorable funding conditions for companies and a revival in industrial production.
He said an “uptrend in growth momentum” is unlikely before September and that less-than-adequate monsoonal rainfall could reduce farm output. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
India’s $1.2 trillion economy, Asia’s third-largest, expanded 6.7 percent in the year ended March 31, the weakest since 2003.
Subbarao also backed Mukherjee’s goal to boost growth to a 9 percent pace each year and sustain that momentum to cut poverty in the South Asian nation.
Fiscal Stimulus
The finance minister said July 14 that the monetary and fiscal stimulus measures have shown positive results, though the economy is still “not out of the woods.”
Reliance Industries Ltd., India’s most valuable company, on July 24 reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand.
Saumitra Chaudhuri, a member of the planning agency that sets India’s development agenda, said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when rates should be increased to check inflation.
“Demand isn’t so strong. Inflation has picked up a head of steam -- though it’s not alarming, it certainly can’t be ignored,” said Chaudhuri, a former adviser to Prime Minister Manmohan Singh. “At this point to try and switch to a tighter policy may not be prudent.”
Subbarao said the central bank will maintain an “accommodative monetary stance” until there are “definite and robust” signs of recovery.
“This accommodative monetary stance is, however, not the steady state stance,” Subbarao said. “On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum.”

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Dollar Falls Toward Seven-Week Low Against Euro on Stock Rally

July 28 -- The dollar fell toward its lowest level in seven weeks against the euro as Asian stocks extended a global rally, adding to evidence investors are shifting to higher-yielding assets.
The Australian dollar rose for a third day against the greenback after the Reserve Bank of Australia said the South Pacific nation’s economy may rebound faster than it forecast six months ago. The euro approached a three-week high against the yen after Deutsche Bank AG said second-quarter profit rose 68 percent, beating analysts’ estimates, on increased revenue from trading bonds and stocks.
“Rising share prices will make it easier for investors to take more risks,” said Toshiya Yamauchi, manager of the foreign-exchange margin trading department in Tokyo at Ueda Harlow Ltd. “Under such circumstances, the dollar and the yen will weaken, especially against the currencies of resource-rich nations and emerging markets.”
The dollar declined to $1.4275 per euro as of 7:05 a.m. in London from $1.4232 in New York yesterday, when it touched $1.4298, the lowest level since June 3. The U.S. currency was at 95.13 yen from 95.18 yen.
The euro rose to 135.80 yen from 135.48 yen yesterday, when it reached 136.10 yen, the strongest since July 2. The U.S. dollar fell to as low as C$1.0761 today, its weakest versus Canada’s dollar since Oct. 3.
MSCI’s Asia Pacific index of regional shares rose for an 11th day, the longest winning streak since January 2004, adding to evidence investor risk-appetite is increasing. The index climbed 0.9 percent today.
Dollar Index
The Dollar Index was near the lowest level this year before a report that economists said will show U.S. home prices fell at a slower pace in May, indicating that the American economy is recovering and demand for safe haven currencies will fall.
The S&P/Case Shiller index of 20 major metropolitan areas, scheduled for release today, will show property values fell 17.9 percent in May from a year earlier, according to a Bloomberg News survey of economists. The measure was down 18.1 percent in the 12 months ended April.
The Dollar Index, which the ICE uses to track the greenback against currencies including the yen, pound and Swedish krona, was at 78.476 from 78.626 yesterday, near this year’s low of 78.334 on June 2
The Australian dollar climbed after RBA Governor Glenn Stevens said it appears “that the downturn we are having may turn out not to be one of the more serious ones of the postwar era, in contrast to the experiences of so many other countries.”
Upside Risks
“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago,” the Reserve Bank chief said in Sydney today.
Stevens left the benchmark lending rate at 3 percent on July 7 for a third month amid signs the lowest borrowing costs in half a century and government spending helped the nation skirt a recession.
“With Australia’s economy apparently doing well, there may be no more scope for interest-rate cuts,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “Higher-yielding currencies such as Australia’s dollar will likely be popular, with demand from people in countries with low yields such as Japan.”
Benchmark interest rates of 8.75 percent in Brazil and 0.25 percent in Sweden compare with 0.1 percent in Japan and as low as zero in the U.S.
The Australian dollar rose to 83.02 U.S. cents from 82.27 cents yesterday, and advanced to 78.97 yen from 78.31 yen.
Deutsche Earnings
The euro gained for a fourth day against the yen after Germany’s largest bank said in a statement today net income rose to 1.09 billion euros ($1.55 billion), or 1.64 euros a share, from 649 million euros, or 1.27 euros, a year earlier. Deutsche Bank’s earnings exceeded the 944 million-euro median estimate of 13 analysts surveyed.
“The bank’s results were better than expected,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The latest upmove in the euro could be due to this.”
Deutsche Bank’s Chief Executive Officer Josef Ackermann said the banking industry and financial markets stabilized in the quarter, propelling a fourfold gain in income from debt sales and an improvement in equity trading.
Losses in the yen against the dollar were tempered on speculation Japanese exporters are taking advantage of the currency’s drop in the past week to repatriate earnings from overseas assets before the month-end.
Japanese Exporters
“Exporters are prone to buy the yen, given that the end of the month is near,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale, France’s third- largest bank.
Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.
Adding to pressure on the dollar, China’s Assistant Finance Minister Zhu Guangyao said on the first day of bilateral talks with U.S. officials that his government remains “concerned” about the value of its U.S. assets.
Zhu’s remarks come after repeated public assurances by Treasury Secretary Timothy Geithner that the U.S. is committed to reining in a record budget deficit once an economic recovery is secured. China is the biggest foreign investor in U.S. government debt, and any decline in demand could push up borrowing costs.
“China has massive holdings of Treasuries, so it is obviously worried,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Any diversification away from the dollar could be gradual, and the greenback may weaken a bit.”

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British Pound Extends Gains Against U.S. Dollar, Japanese Yen

July 28 -- The pound extended gains against the dollar and the yen.
The British currency rose 0.3 percent to $1.6540 as of 7:09 a.m. in London. Against the yen, the pound advanced 0.3 percent to 157.33.

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Colombia Peso Set to Drop as Rally Prompts Central Bank Concern

july 28 Colombia’s peso, the world’s best- performing currency in the past four months, will weaken by year-end as the central bank’s commitment to “carefully monitor” the rally discourages investors from betting on further gains, Barclays Plc and RBC Capital Markets said.
The peso has surged 25 percent against the dollar since March 27, the biggest gain among the 176 currencies tracked by Bloomberg, as a jump in oil, the country’s top export, and rising demand for higher-yielding assets lured international investment to Latin America’s fifth-largest economy.
Policy makers said July 24 they were “aware of the risks associated with the peso’s appreciation” after it strengthened more than they expected. Agriculture Minister Andres Fernandez and exporters such as coffee growers are urging Banco de la Republica to buy dollars to weaken the peso.
The central bank’s “verbal intervention will put an end to the peso’s appreciating trend,” said Jimena Zuniga, a Latin America economist at Barclays in New York. The comments “will cause some concern with investors,” she said.
Zuniga forecasts the peso will slide 5 percent to 2,100 per U.S. dollar by yearend, from 1,994.52 yesterday. Paul Biszko, an emerging-markets strategist with RBC Capital Markets in Toronto, predicts the peso will drop to as low as 2,250 in the third quarter and end the year at 2,150.
The central bank’s attempt to reverse the peso’s gains may fail as rising crude oil prices propel the currency further, said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. He forecasts the peso may rise to 1,850 by yearend.
Peso to Extend Rally
“Oil is higher, commodities are higher, risk appetite is coming back and people like emerging markets, so the Colombian peso and other emerging market currencies can see values go up toward the end of the year,” Thin said.
Crude oil has jumped 53 percent this year to $68.02 a barrel on the New York Mercantile Exchange. The peso fell 0.5 percent to 1,994.52 yesterday.
Rising political tension with neighboring Venezuela and Ecuador may also derail the Colombian’s peso rally, said Fernando Losada, an economist at Deutsche Bank Securities Inc. in New York.
Venezuelan President Hugo Chavez said July 23 his government may curb commercial ties with Colombia after President Alvaro Uribe announced plans to allow the U.S. to use its air bases for anti-narcotics combat missions. Venezuela is Colombia’s second-biggest trading partner.
‘Commercial War’
Ecuadorean President Rafael Correa this month imposed tariffs on Colombian goods including meat, clothing and machinery, saying the depreciation of the peso earlier this year hurt his country’s economy. Ecuador, Colombia’s third-largest trade partner, uses the U.S. dollar as its currency. Venezuela and Ecuador account for about 20 percent of Colombia’s exports, according to Deutsche Bank.
“The commercial war between Colombia and Ecuador has already started,” Losada said in comments sent by e-mail. If Chavez follows through on a threat to replace Colombian imports with those from other countries, “the impact on the peso could be important,” he said.
Deutsche Bank estimates the peso will weaken to 2,200 in six months, according to a report yesterday.

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Asian stock rise for 11th day

July 28 Asian stocks climbed, lifting the MSCI Asia Pacific Index for an 11th day, as brokerages upgraded banks and steelmakers ahead of earnings announcements.
Sumitomo Mitsui Financial Group Inc., Japan’s third-largest lender, rose 3.9 percent as Nomura Holdings Inc. recommended investors buy the shares. JFE Holdings Inc., Japan’s No. 2 steelmaker, jumped 7.3 percent after Goldman Sachs Group Inc. said earnings are set to improve from this quarter. James Hardie Industries NV, the biggest seller of home siding in the U.S., added 2.2 percent in Sydney after new-home purchases in America surged the most in eight years.
“Investors have been taking comfort that the reporting season hasn’t been horrific,” said Chris Hall, who helps manage $2.6 billion at Argo Investments Ltd. in Adelaide. “The market’s looking like fair value right now, but definitely not what I’d call cheap.”
The MSCI Asia Pacific Index rose 0.9 percent to 110 as of 3:47 p.m. in Tokyo. An acceleration in China’s economic growth and better-than-expected U.S. earnings have helped drive a 12 percent climb in the past 11 days. That’s the longest winning streak since January 2004.
Hong Kong’s Hang Seng Index gained 0.6 percent, while Taiwan’s Taiex Index rose 1.6 percent. Compal Electronics Inc., the world’s No.2 maker of notebook computers, climbed 3.2 percent in Taipei after the Commercial Times said the company will supply laptops to Acer Inc. India’s Tata Motors Ltd. jumped 5.7 percent after the company reported a jump in profit.
Fluctuating Stocks
Japan’s Nikkei 225 Stock Average swung between gains and losses closed little changed. China’s Shanghai Composite Index fell 0.4 percent, its first drop in a week. Sichuan Expressway Co. slumped 10 percent after tripling in value in its trading debut yesterday.
Futures on the Standard & Poor’s 500 Index slipped 0.2 percent today. The gauge climbed 0.3 percent yesterday as a government report showed sales of new homes jumped 11 percent last month from May, the most in eight years and higher than every economist forecast in a survey.
Sumitomo Mitsui, Japan’s No. 3 listed bank, climbed 3.9 percent to 3,990 yen. The company had its investment rating lifted to “buy” from “neutral” at Nomura with a price estimate of 4,500 yen. Improved capital ratios boost the bank’s growth prospects, Nomura analyst Keisuke Moriyama wrote in a Japanese-language report yesterday.
Mitsubishi UFJ Financial Group Inc., the country’s biggest lender by value, rose 0.4 percent to 555 yen, while smaller rival Mizuho Financial Group Inc. added 0.5 percent to 212 yen. The three banks all report first-quarter earnings this week.
Stimulus Policies
Analysts have boosted estimates since the beginning of April for companies in Asia outside Japan, according to data compiled by Bloomberg. Profit forecasts have actually declined within Japan, the data show.
“Earnings season is kicking into high gear this week, so investors are focusing on the individual winners and losers,” said Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo.
JFE climbed 7.3 percent to 3,550 yen, while Sanyo Special Steel Co. surged 13 percent to 395 yen after Goldman lifted shares of both companies to “buy.” JFE reported a first- quarter net loss of 41.6 billion yen ($437 million) an hour before the close of trading.
“We believe that the outlook for 2010-11 is beginning to improve markedly from our previous assumptions, based on the coordinated policy response from governments around the globe,” analysts led by Rajeev Das wrote in a report. “We also believe the end of the June quarter marks a trough for the current cycle.”
U.S. Economy
James Hardie climbed 2.2 percent to A$5.12 following the U.S. home sales report. Nissan Motor Co., which gets 34 percent of its sales in North America, gained 1.6 percent to 626 yen.
The MSCI Asia Pacific Index has climbed 56 percent from a more than five-year low on March 9 on speculation stimulus policies worldwide will revive the global economy. Stocks on the gauge are valued at an average 24.5 times estimated net income, the most expensive level since March 31.
U.S. companies including Intel Corp. and Apple Inc. this month reported better-then-expected results. Government figures due July 31 may show that the contraction in the U.S. economy narrowed to a 1.5 percent pace in the second quarter, following a 5.5 percent drop in the first three months of 2009, economists surveyed by Bloomberg News predicted.
Compal, which gets 31 percent of its sales in America, rose 3.2 percent to NT$33.50. Acer will contract out the production of 20 million laptops in the first phase of contracts, and Compal will be the largest supplier, the Commercial Times reported today.
Beating Estimates
Sapporo Holdings Ltd. rose 5.5 percent to 600 yen in Tokyo after the brewer said it will post a smaller-than-expected net loss for the six months ended in June.
Tata Motors climbed 5.7 percent to 395.55 rupees. The company posted a 58 percent increase in net income for the quarter ended in June as a change in accounting rules and lower commodity prices helped mask a fall in demand.
In Shanghai, Sichuan Expressway, which operates toll roads, sank 10 percent to 9.81 yuan. The stock soared 203 percent in its first day of trading yesterday.
China’s Shanghai Composite Index has climbed 88 percent this year, as government stimulus, record bank lending and an economic rebound spurs demand for equities. Companies in the benchmark are valued at 26 times estimated earnings, up from 13 times on Nov. 4, when the gauge fell to a two-year low.
“While it’s obvious that the market is in a bubble, the rally could still go on as the government hasn’t stopped the liquidity,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which manages about $285 million. “If a correction starts, that will be powerful.”

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Bank of Israel May Hold Interest Rate at Record Low

The Bank of Israel will probably hold its benchmark interest rate at a record low tomorrow as the economy contracts and unemployment climbs, a survey showed.
The rate will remain at 0.5 percent for a fifth month, according to eight of the nine economists surveyed. One economist predicted it would rise to 0.75 percent. The Jerusalem-based central bank will announce its decision at 5:30 p.m. tomorrow.
Governor Stanley Fischer has lowered the base rate by 3.75 percentage points since October to mitigate the effects of the global financial crisis. The economy contracted an annualized 3.7 percent in the first quarter and unemployment rose to 8.4 percent in May, its highest in almost three years.
“The Bank of Israel won’t rush to raise the interest rate due to the uncertainty regarding the degree of recovery in the global market and the worsening in the labor market,” Rafael Gozlan, chief economist at Leader Capital Markets, said by phone from Tel Aviv.
While inflation accelerated to an annual 3.6 percent in June from 2.8 percent the previous month it is likely to moderate beginning in September, Gozlan said. The government’s target range for inflation is 1 percent to 3 percent.
“We believe that the restrained global inflationary environment, together with the weakening of the domestic labor market, will support inflation of about 1 percent or 1.5 percent in the coming year,” Gozlan said.
Inflation Outlook
Inflation will reach 2.5 percent over the next year, according to a Bank of Israel poll of economists released on July 16, up from the 2.4 percent expected in the previous survey.
The shekel traded at 3.8678 late on July 23, compared with 3.8882 on July 17.
Last week, Israel’s benchmark 5.5 percent Mimshal Shiklit bond due in 2017 rose 0.2 shekel to 105.55, with the yield falling 1 basis point to 4.97 percent. The Tel Aviv Stock Exchange’s benchmark TA-25 Index rose 4.7 percent to 915.44
The following is a list of important events in Israel next week

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Oil Climbs

Crude oil climbed to a three-week high on optimism that the U.S. economy is strengthening and that fuel consumption will rebound later this year.
Oil increased 7.1 percent this week, the biggest gain since May, as companies such as EBay Inc. and Ford Motor Co. posted better-than-expected earnings. Yesterday, the Standard & Poor’s 500 Index rose to the highest level since President Barack Obama was elected on Nov. 4. Stocks fluctuated today.
“We continue to look to the S&P 500 to interpret any economic data,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “It doesn’t matter if it’s earnings, employment or consumer sentiment, oil seems to follow what the S&P does these days.”
Crude oil for September delivery rose 89 cents, or 1.3 percent, to $68.05 a barrel at 2:50 p.m. on the New York Mercantile Exchange, the highest settlement since July 1. Futures are up 53 percent this year and down 54 percent from a record $147.27 reached on July 11, 2008.
Gasoline for August delivery increased 0.27 cent to end the session at $1.9159 a gallon in New York, the highest settlement since June 29. Heating oil for August delivery climbed 1.69 cents, or 1 percent, to $1.7813 a gallon, the highest close since June 29.
Federal Reserve Chairman Ben S. Bernanke said at a House Financial Services Committee hearing today that the central bank is “winding down” emergency measures established to end the financial crisis.
Correlation With Equities
“There’s a belief that any signs of economic growth are good for both fuel demand and equities,” said Bill O’Grady, the chief market strategist for Confluence Investment Management in St. Louis. “We are seeing a correlation between oil and equities, which is not the norm historically.”
Oil has increasingly moved in tandem with benchmark stock indexes. The Dow Jones Industrial Average and U.S. crude futures showed a correlation of 0.7 the past month, up from 0.06 in December, according to data compiled by Bloomberg. A correlation of 1 means the two moved in lockstep.
“We will probably see a decoupling of the oil and equity markets, with oil moving lower,” said Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois, energy consultant. “We don’t usually see a strong correlation between the stock market, oil and the dollar, but that’s been the case this year.”
U.S. Stockpiles
Crude-oil supplies dropped 1.8 million barrels to 342.7 million last week, an Energy Department report on July 22 showed. The reduction left nationwide crude stockpiles 7.3 percent higher than the five-year average for the period.
Gasoline inventories climbed 813,000 barrels to 215.4 million last week, the sixth-straight gain, according to the report. Stockpiles of distillate fuel rose 1.22 million barrels to 160.5 million, the highest since January 1985.
“This week’s rally has been primarily based on bubbling sentiment that the economy will recover,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Some of the earnings this week point to a recovery. The oil-market fundamental picture, though, isn’t looking supportive.”
Brent crude for September settlement on London’s ICE Futures Europe exchange rose $1.07, or 1.5 percent, to end the session at $70.32 a barrel. It was the highest settlement price since June 29.
OPEC Shipments
The Organization of Petroleum Exporting Countries will trim shipments by 1.7 percent in the four weeks ending Aug. 8 as refinery maintenance and faltering demand encourage members to implement supply cuts, consultant Oil Movements said yesterday.
OPEC will reduce exports in the period to 22.39 million barrels a day from 22.78 million a day in the month ended July 11, the tanker-tracker said. It’s the sixth consecutive drop reported in Oil Movements’ weekly reports.
Oil may decline next week because of fuel-supply increases and demand that trails earlier years. Twenty-two of 42 analysts surveyed by Bloomberg News, or 52 percent, said futures will fall through July 31. Nine respondents, or 21 percent, forecast that prices will be little changed, and 11 expected a gain.
Total U.S. daily fuel demand averaged 18.6 million barrels in the past four weeks, down 4.8 percent from a year earlier, the July 22 Energy Department report showed.
Crude oil volume in electronic trading on the Nymex was 350,396 contracts as of 2:58 p.m. in New York. Volume totaled 608,957 contracts yesterday, 20 percent higher than the average over the past three months. Open interest was 1.18 million contracts yesterday. The exchange has a one-business-day delay in reporting open interest and full volume data.

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Dollar Drops to Seven-Week Low as Earnings Pare Safety Demand

The dollar declined to a seven-week low versus the euro and the yen dropped as U.S. company results beat analysts’ estimates, reducing demand for safety.
The euro advanced for a second week after reports showed yesterday that the contraction in European manufacturing and services slowed more than forecast and German business confidence rose. The Canadian dollar reached the highest level since June 2 as oil prices gained and the central bank said the nation’s recession is ending.
“There’s slightly more economic optimism,” said Warren Naphtal, who overseas $870 million in assets as chief investment officer at P/E Investments in Waltham, Massachusetts. “What we are seeing is commodity-sensitive currencies, such as the Canadian dollar, are attracting capital. The main backdrop is improvement in outlook in general and the increase of the negative dollar view.”
The dollar declined 0.7 percent to $1.4202 per euro yesterday from $1.4102 on July 17. It touched $1.4291 on July 23, the weakest level since June 3. The yen slid 1.3 percent to 134.63 against the euro from 132.85. Japan’s currency depreciated 0.6 percent to 94.79 versus the dollar from 94.19.
Brazil’s real added 1.6 percent this week to 1.8957 per dollar and touched 1.8824 on July 23, the strongest level since Sept. 29. Brazil’s policy makers signaled a day earlier that they may stop lowering the target lending rate after cutting it by a half-percentage point to a record low of 8.75 percent.
The yen declined against all of its 16 most-traded counterparts tracked by Bloomberg, dropping 5.2 percent to 12.716 versus Sweden’s krona and declining 4.5 percent to 12.251 against the South African rand.
Rising Stocks
The Dow Jones Industrial Average rose above 9,000 for the first time since January on better-than-expected results from companies including Apple Inc. and Intel Corp., encouraging investors to borrow in Japan and buy higher-yielding assets elsewhere. Japan’s 0.1 percent target lending rate is among the lowest in the developed world.
Among Standard & Poor’s 500 Index companies that have posted second-quarter results, 75 percent beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest rate for a full quarter, Bloomberg data going back to 1993 show. About 300 S&P 500 companies have yet to report for the period.
The Norwegian krone and Canadian dollar were two of the best performers against the dollar among major currencies as crude oil prices rallied 5.4 percent this week to more than $68 a barrel. Oil is the biggest export for both countries.
Krone Versus Dollar
The krone advanced 2.5 percent to 6.2361 per dollar and reached 6.2190 yesterday, the strongest since June 3.
Canada’s currency, known as the loonie, appreciated 2.8 percent this week to C$1.0826 and touched C$1.0795 yesterday, the strongest level since early June.
The Bank of Canada said in a report this week that output will expand at a 1.3 percent annualized pace July through September, replacing a forecast of a 1 percent contraction.
The loonie’s 12 percent rally this year is an “important brake” on growth, and the central bank is watching it “very closely,” Bank of Canada Governor Mark Carney told reporters in Ottawa after releasing the economic outlook.
The euro advanced versus the dollar as Markit Economics said yesterday a composite index of the region’s manufacturing and services industries increased in July more than economists forecast to 46.8, representing the slowest pace of contraction in almost a year. A reading below 50 indicates a decline. The Ifo Institute in Munich said its German business climate index rose to 87.3 this month, a nine-month high.
U.S. Economy
The U.S. economy probably contracted at a 1.5 percent annual rate in the second quarter, after shrinking 5.5 percent in the previous three months, according to the median forecast of 66 economists surveyed by Bloomberg News. The report from the Commerce Department is due on July 31.
Citigroup Inc. recommended its clients “take profit” on a bet that the Canadian dollar will gain further against the yen yesterday. The Canadian currency gained 10 percent to 87.85 yen in the past two weeks.
“It’s difficult to sustain the risk rally in light of the lack of pickup in economic data,” said Todd Elmer, a currency strategist at Citigroup in New York, in an interview.
Investors should look to re-enter the Canadian dollar-yen trade at “better levels” on renewed capital outflow from Japanese investors, strategists including Elmer wrote in a note to clients yesterday.
Polish Zloty
Eastern European currencies such as the Polish zloty will advance in the next two weeks as “hot money” flows into the region on signs of global economic recovery, according to David Woo, global head of foreign-exchange strategy at Barclays Capital in London. The zloty gained 3.1 percent this week to 4.1966 per euro in one of the best performances among emerging- market currencies.
“A lot of investors still sit on a lot of cash on the sideline,” said Woo in an interview on Bloomberg Television this week. “What you are seeing is basically people being forced to essentially put money to work.”
Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee this week that while the U.S. economy is showing “tentative signs of stabilization,” the central bank intends to maintain a “highly accommodative” monetary policy for an extended period.

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