Commodities pull shares down as dollar spikes
London, October 31, 2011
World equities fell on Monday after commodity shares were hit by a stronger dollar which jumped in the wake of Japanese intervention to weaken the yen, while returning doubts over the EU's plan to solve the debt crisis added to the cautious tone.
US crude futures also fell, by 0.8 percent, as the dollar hit a three-month high, making commodities priced in the greenback more expensive for investors holding other currencies, cooling demand.
Japan sold the yen for the second time in less than three months, saying it intervened unilaterally to counter speculative moves that were hurting the economy.
The dollar, which had fallen to a record low of 75.31 yen earlier in Asian trade, rose more than 4 percent against to as high as 79.55 yen . It was up 2.9 percent at 77.96 yen with traders saying more intervention would likely be needed for a more durable impact.
The dollar has come under pressure as investors cautiously returned to riskier assets such as equities after Europe's leaders laid out a basic framework to tackle the sovereign debt crisis last week.
"The focus is to make it as painful as possible to hold long dollar/yen positions," said Sebastien Galy, currency strategist at Societe Generale. "If dollar/yen continues to go aggressively lower then the Japanese authorities will feel the need to intervene again".
Tokyo's latest move since its record selling of 4.5 trillion yen ($59.4 billion) on Aug. 4 followed weeks of warnings by officials that intervention was possible given the yen's strength.
Traders said the size of Monday's action could be as large or larger than previous interventions while analysts said it could be difficult for authorities to maintain the rise in dollar/yen as Japanese exporters may sell into the dollar's rally to step up their currency hedging.
The euro, meanwhile, gave up most of last week's gains on the dollar's broad-based advance. It was last 1 percent down at $1.400 , retreating further from a seven-week high around $1.4247 last Thursday following news of the debt rescue plan.
It still looked set to end the month up nearly 5 percent for its best monthly performance in just over a year, but speculation about a possible interest rate cut on Thursday by the European Central Bank could limit its upside for now.
The dollar could also come under pressure with Federal Reserve Chairman Ben Bernanke likely to repeat his disappointment at the pace of economic recovery when the Fed ends its two-day policy meeting on Wednesday.
Equities gave back some of last week's gains as the decline in metal prices on a firmer dollar hit mining stocks and banking shares came under renewed selling.
US equities were set to open lower after four weeks of gains, with S&P index futures losing 0.9 percent and the Dow Jones Industrial average futures down 0.7 percent.
The MSCI world equity index fell 1.2 percent, pulling back from its highest levels in nearly three months hit last week as the European plan to resolve the debt crisis spurred a relief rally.
The pan-European FTSEurofirst 300 index was 1.3 percent lower, after rising 4.1 percent last week, while emerging stocks shed 0.85 percent.
Japan told the head of Europe's bailout fund on Monday that it would continue to buy its bonds, but, like fellow potential investor China, did not commit to putting cash into a mooted special purpose vehicle to enhance the rescue fund's firepower. - Reuters