Asian News

[Ichiro]

Greenspan: Fed Troubled by Rates

From MoneyNews.com and NewsMax.com --date 8 Aug 06.

At a business dinner Tuesday, recently retired Federal Reserve Chairman Alan Greenspan revealed that the central bank is deeply troubled by its inability to control long term interest rates.

At the private meeting Greenspan told attendees that short-term U.S. interest rates might have to rise even further, according to a report from Bloomberg News.

Greenspan departed as Fed chairman on January 31, but before doing so led the central bank in raising short term rates dramatically - some 14 times to a rate of 4.5% - the largest aggregate rate increase in two decades.

Greenspan and others had claimed the rate rises were implemented to cure inflation.

But Greenspan's private comments suggest the Fed was also concerned about the housing market bubble. [Editor's Note: Financial Intelligence Report detailed that Greenspan's actions would lead to a coming recession and housing bust. Read more Go Here Now.]

An unidentified participant at the private New York gathering related that Greenspan told an assembly of Lehman Brothers clients that low long-term rates were inhibiting the Fed's attempts to control the economy and that further rate hikes may be necessary as "homeowners are borrowing more against the value of their homes to finance spending."

But the ex-chairman was vague, failing to specify exactly how high rates would go. Ominously, he indicated that the markets were underestimating just how much more tightening the Fed had to do.

At the same meeting Greenspan reportedly offered a positive view of the U.S. economy.

But his comments were not the first time he has expressed concern about key factors driving the economy, including several remarks he made last September including:

* Greenspan offered a strong warning saying that Wall Street investment firms could prove incapable of handling all the financial risk posed by mortgage giants Fannie Mae and Freddie Mac.

* France's Finance Minister revealed that Greenspan told him the U.S. had "lost control" of its budget deficit.

Finance Minister Thierry Breton quoted Greenspan expressing exasperation at U.S efforts to curb its growing budgetary red ink.

"The United States has lost control of their budget at a time when racking up deficits has been authorized without any control (from Congress)," Breton said.

* In a speech to the National Association for Business Economics in Chicago, Federal Reserve Chairman Alan Greenspan sounded the alarm to American consumers that the long era of low interest rates was coming to an end.

"History cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets," Greenspan said.

In his speech to the NABE, Greenspan reiterated that Americans counting on low rates to refinance homes and buy big-ticket items might soon see a markedly different interest rate environment. [Editor's Note: Could interest rate increases cause a housing bust? Read More Here.]

That same week, Greenspan told a banker's group in California that homeowners with considerable debt should be on high alert. Specific borrowers and lenders "could be exposed to significant losses," he told the group.

The markets appeared to coolly accept reports of Greenspan's remarks at the Lehman Bros. dinner. The Dow Jones rose slightly, as did the Nasdaq and S&P by the close of trading Wednesday.

NewsMax's lead analyst and trader Andrew Wilkinson said Greenspan's comments "could create a short-term spike in the dollar but should have a longer-lasting effect on the price of gold, from an inflationary perspective."

He added that the former Fed chair's words were "negative for bonds, although stocks are still going up since it means the economy is strong."

 

[cowboy]

I fund "How High today"

I was thinking of jumping to the I fund but with the low dollar the fund should go up good today but then the Witchdoctors and their magic wands are there to goof you up! The question is you don't know what your buying at?

 

[Dave M]

I-fund is volatile, yes, Cowpoke. You take the natural variability of the (overseas) markets, the variability of the exhange rates, and the variability imposed by the fund managers and you can get some big swings.

For me the answer was to hold on to it for a minimum of 30 days at a time. Last year there were lots of times when when the I-fund was the only thing holding up my account. This year I have 25% of the Kitty riding the I-fund.

Dave

 

[Birchtree]

Use Braille and buy

Cowboy,

I know you won't let a few variations hold you back from the I fund - just close your eyes and do it. The FTSE is in rocket mode - the ECB I believe mentioned they have no desire to raise their interest rates for the next months. Ben, are you listening? You need to show us you are incharge - Greenspan is now retired - pause and help GM.

Dennis

 

[Birchtree]

Error alert

I think I ment BOE and not ECB.

Just trying to draw the Wizard back into conversation.

 

[cowboy]

I am currently all S fund right now and it isn't chicken feed to me. I got this gut feeling to set tight. But hard to tell what tomorrow brings. Im trying to learn patience hopefully it pays off. So far I am happy with the move I made. The I fund only swung a pitiance down compared to the US markets and its voltile swings it can have. So making me think it hasn't yet bottomed out but maybe the others didn't bottum either. I believe the markets are treading water at this time and were going up the high side of the wave.

 

[Ichiro]

Bank of Japan governor expects inflation to rise

By David Pilling in Tokyo Thu Feb 9, 4:40 AM ET

Toshihiko Fukui, Bank of Japan governor, said on Thursday he expected inflation would begin to rise by a wider margin in the first quarter, adding to speculation that the central bank is preparing to end its super-loose quantitative-easing policy.

"We could not say today that the consumer price index has stabilised above zero, but from the January data onwards, CPI will show a relatively clear rise," he said, speaking at a press conference after a two-day policy board meeting.

Private economists expect the core CPI, which includes fresh food prices, to rise by 0.4 per cent in January and February, compared with an increase of just 0.1 per cent in November and December, and negative rates until last September.

The BoJ is committed to keep its four-year-old ultra-loose monetary policy in place until the core CPI stabilises above zero and until a majority of the policy board considers it will stay that way.

In spite of his optimism on the likely progress of inflation, the governor would not be drawn on the likely timing of any move, which bank watchers say could come in March or in one of two meetings scheduled for April.

The bank is expected to end quantitative easing by mopping up excess liquidity. The governor has made clear that interest rates could remain at zero long after that.

"I cannot say if a policy shift is in sight," Mr Fukui said, though he added that policy considerations were becoming more important with each successive meeting.

The nine-member board ended Thursday's meeting by keeping policy unchanged, flooding the market with Y30,000bn-Y35,000bn of liquidity, compared with the roughly Y6,000bn needed to push overnight rates to zero.

Two members voted against the resolution, arguing that quantitative easing, adopted in March 2001 to head off a deflationary spiral, should be ended now.

Mr Fukui on Thursday indicated his apparent dislike for inflation targeting, saying that stable Japanese prices tended to be lower than those in other countries. In the 1980s, average inflation was about 1.3 per cent, the bank said.

Mr Fukui described comments from observers suggesting that the bank target an inflation rate of 2-3 per cent as "mysterious".

Haruhiko Kuroda, president of the Asian Development Bank and former Japanese vice-minister of finance, said most central banks built in a margin of error into their inflationary calculations. Anything above a 1 per cent rate of CPI change was deflationary he said, since the CPI overestimated inflation by about 1 point.

"Deflation is not yet overcome," said Mr Kuroda, who favours the adoption of an inflation target. "The only objective of monetary policy is to obtain sustained price stability and that's not achieved. So it is not a good time to change policy."

Kiichi Murashima, economist at Nikko Citigroup, said the bank was likely to start reducing its liquidity targets at the April 28 meeting, though he did not rule out a move before then.

By April 28, the BoJ would have three more sets of monthly CPI data as well as the results of its Tankan business confidence survey. If these were both positive, the bank would probably feel able to reduce liquidity targets in an orderly way, he said.

 

[Ichiro]

South Korea raises interest rate again. Other asian countries (Thailand, Malaysia and India) raised their interest rates in the past several months. The rising oil price is causing an inflationary environment worldwide and we sure need to find an alternative to oil.


South Korean Central Bank Raises Benchmark Rate to 4% (Update5)

Feb. 9 (Bloomberg) -- South Korea's central bank raised its benchmark interest rate by a quarter percentage point to a three- year high to keep inflation from accelerating.

Bank of Korea Governor Park Seung and his six fellow policy makers raised the overnight call rate to 4 percent at a meeting in Seoul today, the third increase in five months. Five of 12 analysts polled by Bloomberg News expected the decision.

Park, whose four-year term ends March 31, ignored calls by government officials such as Vice Finance Minister Kwon Tae Shin to keep rates unchanged. The governor expressed confidence that Asia's third-largest economy will expand at least 5 percent this year, the fastest in four years, even as a stronger won threatens to curb export growth.

``Today's decision is a very strong recognition that the Bank of Korea is backing a recovery in the domestic economy,'' said Huw McKay, senior economist at Westpac Banking Corp. in Sydney, who expected a rate increase. ``It shows they're prepared to back that forecast in the face of a strong won exchange rate.''

South Korea's Kospi index rose 0.8 percent to close at 1321.66 at 3 p.m. The benchmark, which soared 54 percent last year, reached a record 1426.21 on Jan. 17. The won, which rose 6.2 percent in the past 12 months, fell 0.2 percent to 972.70 against the dollar.

Bonds also rose on optimism the won's strength will prompt the bank to pause in raising rates. The yield on the benchmark three-year government bond fell 10 basis points to 4.85 percent at 3:30 p.m., according to the Korea Securities Dealers Association. The yield reached the lowest level since Oct. 21.

Uncertainty Lifted

``The rate increase lifted the uncertainty that has long kept investors from increasing their holdings,'' said Shin Joo Hyun, a fund manager at Industrial Bank of Korea in Seoul. ``The view is now that raising rates further is hard given that a stronger won clouds the economic outlook.''

Central banks in Asian countries such as India, Thailand and Malaysia have raised interest rates in past months as rising domestic demand and soaring oil prices threaten to fan inflation. The Bank of Japan today held rates at almost zero as it gathers more evidence that deflation has ended.

The U.S. Federal Reserve raised its main lending rate to 4.5 percent on Jan. 31.

Consumers increased spending at the fastest pace in a decade in December and companies boosted investment, the National Statistical Office said on Jan. 27. A separate report today showed consumer confidence rising to a nine-month high in January.

`No Problem'

Rising spending by consumers and businesses may stoke inflation this year, according to the central bank. Consumer prices rose in January at the fastest pace in 10 months, gaining 0.8 percent from December. From a year earlier, prices rose 2.8 percent.

Inflation will accelerate to 3 percent this year from 2.7 percent in 2005, the central bank said in December. Core inflation, which excludes food and energy, will probably accelerate to 3.3 percent in the second half of 2006 from 2.1 percent in the first six months, it forecast. The central bank targets core inflation of 2.5 percent to 3.5 percent.

``The economy is recovering faster than expected and the monetary policy should gradually move to a neutral stance to reduce the side effects of a low interest rate policy,'' Park said at a press briefing in Seoul. ``There are some negative factors like the won gains and higher oil costs but after our studies, we confirmed that there'll be no problem in achieving a 5 percent growth despite those factors.''

The economy grew 4 percent last year, the central bank said.

Government Opposition

With today's increase, Park has brought the call rate back to where it was when he became Governor in April 2002. Park raised interest rates a month after taking over. He then went on to slash borrowing costs to record lows in 2004 as South Koreans were struggling to shake off the burdens of a credit-card binge that left many mired in debt.

Park, 69, increased borrowing costs even after some government officials expressed concern that such a move may stunt economic growth.

``It is advisable for interest rates to be maintained at the current level,'' vice minister Kwon said in an interview with a local cable television Feb. 7. He cited the rising won and higher oil prices as sources of concern for South Korea's economy. Finance Minister Han Duck Soo yesterday said he hopes the Bank of Korea won't ``tighten too much.''

A stronger won makes imported goods cheaper, easing pressure on consumer prices to climb. At the same time, it hurts sales for South Korean exporters such as Samsung Electronics Co. Exports, which account for about 40 percent of the economy, grew 4.3 percent in January, the commerce ministry said on Feb. 1.

To contact the reporter on this story:
Seyoon Kim in Seoul at skim7@bloomberg.net

Last Updated: February 9, 2006 03:22 EST

 

[oldschool]

nikkei down around 2% currently - apparently brokerage and property stocks on the decline due to fears that BOJ will raise rates.

Random news: Last week the International Herald Tribune ran a story saying 60% of the container ships traveling from North America to China travel empty. 100% full on the return trip.

 

[Ichiro]

Moneynews---9 Feb 06.

Will Snow Blast China Currency Manipulation?

Currency speculators are bracing themselves over reports that U.S. Treasury Secretary John Snow will label China as a currency manipulator in his next semi-annual report to Congress.

Bloomberg cites Senator Richard Shelby, chairman of the Senate Banking Committee, who says Snow may do just that.

"Treasury should call it like it is," Shelby told Bloomberg. "If the Chinese are manipulating the currency, as I believe they are, and he's got evidence of that, then he should say so.''

But that's not to say that Snow is a sure bet.

Shelby told Bloomberg that he's skeptical Snow will call China out.

"I don't expect him to,'' he said. "People don't usually do that politically. There's political ramifications to it.''

Congress has been after China for months to come clean on its currency management. Pending legislation from Senators Charles Schumer and Lindsey Graham would penalize China with high tariffs should the country fail to make its currency more flexible.

Any word from Snow that China is engaging in fraudulent behavior regarding its currency will make it easier for lawmakers to pass such legislation.

According to Bloomberg, China's trade surplus with the U.S. rose 25% to $185.3 billion through November 2005. That represents over one-third of the overall U.S. trade deficit, which in 2005 was a record $661.8 billion.

"Snow has been calling on China to allow its currency to move in line with market forces, stressing the point during an eight-day trip there in October," says Bloomberg.

"In two reports to Congress last year, Snow stopped short of calling the Asian nation a manipulator."

 

[Ichiro]

Bears make big bets in Japan rate derivatives
Fri Feb 10, 2006 4:46 AM ET16

By Hideyuki Sano

TOKYO, Feb 10 (Reuters) - Players in Japan's long-dormant interest rate derivative markets are galvanised by the spectre of the Bank of Japan soon ditching its super-easy policy that has pegged interest rates near zero for five years.

Traders spotted some market players making huge bets on a deeper market sell-off in bond futures, options and interest rate swaps after BOJ Governor Toshihiko Fukui delivered a wake-up call on the long-expected policy shift.

"There have been some speculative moves, the sort of moves we haven't seen in the past," said Takeo Okuhara, a senior economist at Daiwa Institute of Research. "These moves are not eye-catching. But they are signalling that some players are looking to big market moves."

Fukui sent the strongest signal yet on Thursday that the central bank is close to ending its "quantitative easing" policy of force-feeding banks with cash, sparking a slide that drove Japanese government bond futures to 1-1/2-year lows.

Analysts were surprised to see what big positions market players have built up in futures so far. At the end of Friday, there were 152,780 open positions, the highest since May 2000.

Some big accounts -- said to be either Japanese big banks or hedge funds -- appear to have dumped bond futures aggressively in an attempt to push the market sharply lower, traders said.

John Richards, director of Asian interest-rate strategy at Barclays Capital in Tokyo, said hedge funds were just "blasting away at futures".

Also spooking many bond traders were unusually big bets in put options for JGB futures. Puts give the holder the right to sell JGB futures for a certain period at a pre-set price, making money when prices fall.

Traders spotted a few huge trades done in the past week in puts for June JGB futures with a strike price at 132 <0#2JGBM6+>, which suggests those players had made highly speculative bets on a further fall in JGB prices.

The current price of the June contract <2JGBM6> is 134.83, which means the contract would have to tumble nearly three full points for a full payout.

Traders also said it was unusual to see trade in options expiring in such a distant future. Most deals are normally concentrated on the Tokyo Stock Exchange's front-end contract, currently the March contract. Continued ...

© Reuters 2006. All Rights Reserved.

 

[Ichiro]

Bears make big bets in Japan rate derivatives

(continued from above) page 2 of 2

Fri Feb 10, 2006 4:46 AM ET10



Another development that caught the attention of traders was a sharp widening in the spread between interest rate swap rates and Japanese government bond yields -- the so-called swap spread, or LT spread.

Interest rate swaps allow users to tweak their exposure to fixed or floating interest rates, with the floating rates based on the yen London Interbank Offered Rate (LIBOR).

Banks that expect rates to rise would try to pay a fixed rate when rates are low and then receive LIBOR in the future.

Ten-year yen swap spreads hovered around 5 to 10 basis points from late 2003 to late last year. But the spread, which gradually started to expand this year, exploded this week to over 20 basis points, nearly doubling in just two weeks.

Analysts think it suggested that big banks were paying swap rates aggressively -- some seeking protection from a further surge in yields and others simply trying to cash in on a deeper bear market.

"I think some players have been preparing for a rise in yields by paying swaps and selling put options," said Koji Ochiai, a senior analyst at Mizuho Securities.

 

[Ichiro]

Dollar/yen extends losses, tumbles 1 percent

Fri Feb 10, 2006 2:41 AM ET10

TOKYO, Feb 10 (Reuters) - The dollar extended its slide against the yen on Friday, tumbling 1 percent on the day after the yen received a boost from upbeat economic data that supported the view that the Bank of Japan could soon end its super-loose monetary policy.

The dollar fell to around 117.65 yen <JPY=>. Against the euro, the yen traded around 141 yen <EURJPY=>, up more than 0.9 percent on the day.

 

[Ichiro]

FOREX-Yen soars 1 pct on BOJ talk, US trade in focus
Fri Feb 10, 2006 3:46 AM ET

By Carolyn Cohn
LONDON, Feb 10 (Reuters) - The yen soared 1 percent against the dollar and euro on Friday after a series of upbeat economic data boosted expectations the Bank of Japan will soon end its ultra-easy monetary policy.

Japanese core machinery orders rose 6.8 percent in December from the previous month, exceeding market expectations for a 1.5 percent increase. There was also a 2.7 percent year-on-year rise in the corporate goods price index in January, its fastest rise in nearly 16 years.

But the dollar held steady against the euro ahead of key U.S. trade data at 1330 GMT, forecast to show a widening in the deficit in December to $65.0 billion.
"The main reason for the yen's strength is the data we got overnight -- it suggests deflation is coming to an end," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt.
"We would need a very bad trade number to hurt the dollar against the euro, given positive dollar sentiment at the moment."

By 0820 GMT, the dollar was trading at 117.86 yen <JPY=>, close to earlier lows of 117.54.
The euro was trading at 140.94 yen <EURJPY=>, off earlier two-week lows of 140.71.
Traders said hedge funds were buying yen throughout the day. There was also chat that Asian banks were selling the dollar against the yen.
Euro/dollar trading was at $1.1969 <EUR=>, largely unchanged from late U.S. trade.
European Central Bank Governing Council member Vitor Constancio speaks at 0930 GMT.

END TO LOOSE POLICY?

BOJ Governor Toshihiko Fukui on Thursday gave his strongest hint yet that the central bank may soon end its quantitative easing monetary policy, saying that from its next board meeting onwards the central bank would have to consider even more carefully whether it was time for a policy shift.
The BOJ board voted on Thursday to keep its five-year-old policy of flooding the money market with excess cash.

Interest rate differentials between the yen, the dollar and the euro are unlikely to narrow quickly as overnight interest rates in Japan remain near zero, traders said.

The Federal Reserve boosted its funds rate for the 14th straight time to 4.5 percent last week, boosting the dollar against the yen and the euro this month after a dip in January.

The market now thinks the Fed could further increase interest rates in March to 4.75 percent, depending on U.S. economic data.

Some analysts said Fukui also spurred speculation that interest rates may not remain at zero for very long, raising expectations that the BOJ could end policy as soon as March, although many continued to anticipate an April exit.
"Most people in the market see the BOJ scrapping the quantitative easing policy at its board meeting on April 28 as a done deal," said Daisuke Uno, market strategist at Sumitomo Mitsui Banking Corp in Tokyo.

According to a Reuters poll on Thursday, eight out of 12 market participants and analysts said the BOJ will likely scrap its easing policy on April 28, when the central bank will also release its semi-annual report on economic outlook.
Concerns about rising interest rates pushed the yield on two-year Japanese government bonds to a five-year high on Friday. The five-year yield hit its highest level since September 2003.

However, Chief Cabinet Secretary Shinzo Abe said on Friday: "There is no change in our understanding that moderate deflation continues."

TRADE FOCUS.

Market participants said much activity on Friday was driven by traders trimming long dollar positions ahead of December data for U.S. trade as poorer-than-expected figures could shift the market's focus to the growing U.S. trade gap and crank up selling pressure on the dollar.
Economists expect the data to show the U.S. trade deficit widened to $65 billion in December from November's $64.2 billion, which was the third-highest monthly level ever.

Finance ministers from the Group of Eight leading industrial nations start a two-day meeting in Russia later in the day, but they are expected to talk about the economic impact of high energy prices rather than foreign exchange issues.

© Reuters 2006. All Rights Reserved.

 

[roguewave]

Ichiro, if the yen should start strengthing against the dollar based on possible rate hikes, it would be interesting to try and predict or track the exchange rate between the yen/yuan. This would suggest a MAJOR shift in policy regards the yen/dollar relationship as it pertains to Japan protecting its exporters' markets in trade with American consumers. Keep on eye on China Japan relations as I've been betting that China will force Japan into a decision as it pertains to future trade relations.

 

[Ichiro]

Dollar drops broadly in wake of US trade data
Fri Feb 10, 2006 9:08 AM ET8



NEW YORK, Feb 10 (Reuters) - The dollar dropped broadly on Friday extending losses against the euro and yen in the wake of a report showing the U.S. trade gap widened to a record in 2005.

The euro <EUR=> climbed to intraday highs of $1.2021, up 0.3 percent from Thursday.

The dollar sagged below 117 yen, tripping a series of pre-set sell dollar orders that took the U.S. currency to a low of 116.97 yen, down 1.5 percent, on track for its largest one-day decline in nearly two months.

Earlier, the U.S. government said the U.S. trade deficit widened 17.5 percent last year to a record $725.76 billion.


© Reuters 2006. All Rights Reserved.

 

[Ichiro]

Currency Strategists: Goldman Says Dollar Has Reached `Peak'

Feb. 10 (Bloomberg) -- Investors should sell the dollar versus the euro because the U.S. currency has reached its ``peak'' and reflects expectations the Federal Reserve will keep raising interest rates, said Goldman, Sachs & Co.

The dollar climbed nearly 3 percent against the euro since trading at its low for the year last month as investors increased bets the Fed will raise its target rate two more times. A majority of futures traders are now pricing in rate increases at the Fed's meetings in March and May.

``The dollar is going to have a hard time,'' said Jens Nordvig, a currency strategist in New York with Goldman, in an interview yesterday. ``Investor expectations for the Fed will run out of steam.''

Against the euro, the dollar weakened to $1.1999 at 2:40 p.m. in Tokyo from $1.1980 yesterday in New York. The U.S. currency has rallied from $1.2323 on Jan. 25, the weakest since September.

Goldman, the eighth-biggest trader in the $1.9 trillion-a- day currency market, recommended selling the dollar at $1.1950 per euro on Feb. 8. The firm said to exit the trade to limit losses should the currency close stronger than $1.1780.

Nordvig, who joined Goldman's London office in 2001 from the financial research firm IDEAGlobal, expects the dollar to decline to $1.25 per euro in six months and to $1.30 in a year.

Traders are pricing in a 94 percent chance the Fed will raise its federal funds rate a quarter-percentage point to 4.75 percent at a March 28 meeting. The odds of another quarter-point increase at the next meeting on May 10 are now 59 percent, up from about zero percent last month. The Fed raised its benchmark rate at a 14th consecutive meeting on Jan. 31.

`Unlikely'

The central bank said in a statement accompanying the decision that ``some further policy firming may be needed'' to keep inflation in check even as it stopped saying rates may rise at a ``measured'' pace.

``A further significant upward shift in rate expectations seems unlikely in the near term given the current Fed language and the uncertainty about the strength of the data ahead of the March meeting,'' wrote Nordvig, who has a masters degree in economics from the University of Aarhus in Denmark.

Demand for the dollar increased after former Fed Chairman Alan Greenspan bolstered speculation the central bank will continue raising interest rates.

Greenspan suggested at a dinner on Feb. 7 that low long- term rates were limiting the Fed's ability to manage the economy, according to a person briefed by a participant at the meeting. Greenspan made his comments to about a dozen clients of Lehman Brothers Holdings Inc. in New York, according to the person, who declined to be identified.

Kerri Cohen, a spokesman for Lehman in New York, on Feb. 8 declined to comment about Greenspan speaking to customers.

Lehman Recommendation

Lehman is recommending investors increase bets the dollar will rise versus the euro on expectations new Fed Chairman Ben Bernanke will ``leave the door open'' for more interest-rate increases, according to a report.

``We expect the dollar's bullish momentum to remain intact,'' James McCormick, Lehman's London-based head of global currency research, wrote in a report sent to clients yesterday. ``Bernanke is more hawkish than many in the market assume.''

McCormick didn't mention the dinner in his report.

Twin Deficits

Nordvig also said the dollar may decline on speculation widening U.S. trade and federal budget deficits will undermine demand for the currency. The White House projects a record budget deficit of $423 billion for the current fiscal year.

A report today may show the trade shortfall grew to $65 billion in December, the third-largest ever, based on the median forecast in a Bloomberg survey. The gap was a record $68.1 billion in October. A widening deficit means more dollars need to be converted to other currencies to pay for imports.

``We also judge that the dollar is vulnerable from a structural perspective,'' wrote Nordvig. ``External imbalances in the U.S. are not a key market focus at the moment, but this could change on signs of weakening flow support.''

The Treasury Department will release its report on foreign holdings of U.S. assets for December on Feb. 15. Foreign investors raised their holdings of Treasury notes, corporate bonds, stocks and other financial assets by $89.1 billion in November, a slower pace than the record $104.2 billion gain a month earlier.

``We could see a slowdown in portfolio inflows in the official statistics in coming months,'' Nordvig wrote. Next week's data will be ``the first signpost to watch,'' he said.

Goldman also recommended selling the dollar versus South Africa's currency on expectations the rand will benefit from ``broad dollar weakness.''

The rand will also gain because the decline in gold prices is ``coming to end,'' Nordvig wrote. Gold, South Africa's largest export, fell 3.8 percent on Feb. 7, the biggest one-day drop since October 1997, after surging to a 25-year high last week. The precious metal rose 1.5 percent yesterday.

To contact the reporter on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net.

 

[Ichiro]

Yen Gains Most in a Month After Japanese Machine Orders Climb

Feb. 10 (Bloomberg) -- The yen gained the most in a month against the dollar after a Japanese government report showed a jump in machinery orders, suggesting the world's second-largest economy is accelerating.

The yen advanced against all 16 major currencies as the faster growth increased the chances the Bank of Japan will end its five-year-old policy of holding interest rates near zero percent to fight deflation.

``This says that things in Japan are on pretty solid ground and economic growth is picking up,'' said Eric Darwell, a currency strategist at Citigroup Global Markets in New York. ``We could see quite a bit of yen strength.''

Japan's currency rose 1 percent to 117.60 per dollar at 11:23 a.m. in New York, the largest rally since Jan. 6. It has gained 1.13 percent this week, snapping a three-week slide. The yen advanced to 140.14 per euro, the biggest gain since mid- December. The dollar gained 0.9 percent this week to $1.1914 per euro, reaching a five-week high.

The yen will strengthen to 116 per dollar in three months and 110 in six months, Darwell said.

The dollar gained against the euro after reaching a so- called support level at $1.2024 per euro, where it finished last week, said Tim Mazanec, senior currency strategist at Investors Bank & Trust Co. in Boston. A support level is an area where buy orders are clustered.

The dollar remained lower against the yen after a government report showed the U.S. trade deficit widened to $65.7 billion in December, the third-largest ever, from a revised $64.7 billion the prior month. Bigger deficits mean more dollars need to be converted into other currencies to pay for imports.

No Surprise

``The deficit is getting worse, but that's not a surprise,'' said Greg Anderson, a currency strategist at ABN Amro Bank NV in Chicago. He expects the dollar to fall to 111 yen and $1.28 per euro by year-end.

Private machinery orders, excluding shipping and utilities, rose a seasonally adjusted 6.8 percent in December, the Cabinet Office said in Tokyo. That's more than four times the 1.5 percent median forecast of economists surveyed by Bloomberg.

``Machinery orders jumped massively and that's been a trigger to think we could be near to the end of the BOJ's zero interest-rate policy,'' said Michael Klawitter, a currency strategist at WestLB AG in Duesseldorf, Germany. ``That's pushed the yen higher.''

A government report next week will probably show Japan's economy grew at a 5 percent annual pace in the fourth quarter, according to the median forecast of 28 economists in a Bloomberg survey. That's more than four times the growth in the U.S. in the same period.

Price Gains

BOJ Governor Toshihiko Fukui said yesterday core consumer prices will ``show clear gains in January.'' Core prices, which exclude fresh food, rose for a second month in December, gains the bank says must be sustained for it to end its deflation- fighting policy known as quantitative easing.

``Our judgment of core consumer prices will become increasingly important from our next policy meeting,'' Fukui said after a policy-setting meeting in Tokyo. The next meeting is March 8 and 9.

The central bank yesterday kept a target for reserves made available to lenders at between 30 trillion yen ($253 billion) and 35 trillion yen, six times more than in March 2001.

Ten out of 15 economists surveyed by Bloomberg before Fukui's comments said the bank may start to lower its reserve target in April and one said it could happen as early as March.

Higher Rates

The U.S. currency gained versus the euro this week on speculation the U.S. interest-rate advantage over Europe will widen.

Chicago Federal Reserve Bank President Michael Moskow said yesterday the central bank may need to keep raising its key rate to cap inflation. The Fed has lifted rates 14 times since June 2004 to 4.5 percent. In contrast, the European Central Bank raised its main rate in December for the first time in five years to 2.25 percent.

``The dollar should remain firm,'' said Mazanec. ``The ECB may not be as aggressive as the Fed and that should lead to dollar gains in 2006.'' He said the dollar may reach $1.16 per euro and 124 yen before year-end.

At 4.63 percent, two-year Treasury notes yield 1.74 percentage points more than the German government bond with a similar maturity, near the highest in about two months.

Yen gains may be limited after overseas investors including pension funds yesterday bought almost two-thirds of the U.S. government's auction of $14 billion of 30-year securities, the first sale since 2001. The result suggests the world's largest economy continues to attract investment.

``Good auction results show continuing inflows of foreign funds into the U.S., supporting the dollar,'' said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan.

The difference in yields between two-year U.S. Treasuries and Japanese debt reached 4.33 percentage points yesterday, the most since 2001. It stood at 4.27 points today.

To contact the reporter on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net

 

[Fivetears]

OK Ichiro... In Cave-speak for the rest of us.

OK Ichiro... In caveman speak for the rest of us.

Cipher it all. What sayeth you... What sayeth the flock?

I Fund outlook Good?

I Fund outlook Bad?

 

[Ichiro]

Hi Fivetears,

Well, let me say that i was rather surprised with the movement of the foreign currency on Friday. I mean the sharp change in the direction of the interest rate. Both the yen and the euros dropped after the announcement of the huge US budget deficit. But, the euros recovered very fast. I bet that the Chinese are buying the euros when it dips. The Nikkei took a beating the day before because of the possible increase in the interest rate in the near future by BOJ because Japan is moving from a deflationary to an inflationary environment. The cost of oil will be the big jocker for Japan and also for southasian countries since they must import their oil.

The BOJ will probably increase the rate as early as March 06 and late as April 06. And this will happen. The Nikkei average already reflects this increase in the interest rate by BOJ. I think initially the nikkei will drop when BOJ increases the interest rate increase but the market will recover. Why? Japan's interest rate is very low and even if they increased it, it still low.. I mean less than 1 percent. Please note that the US Federal Reserve increased the interest rate in excess of 10 times... But, did the DOW drop much. No.. The bottom line is that I dont think that the increase in the interest rate by BOJ will cause a crash in the Nikkei. It will just offset the interest rate increase by the Federal Reserve.

But, if the Federal Reserve raises the interest rate by .5% in March... watch out... The dollar will soar as compared to the yen and the euros and it will have a big impact on our I fund. March is going to be a very critical month for us since FED and the European will increase their rates and Japan sooner or later.

I think by year-end the dollar/Yen exchange rate may be from 105 to 110. The outlook for the I fund looks good and we should make about 15 to 20 % return on our I fund. But, dont put all your eggs into the I fund... Put some into the C fund because the large cap stocks are very undervalued compared to the small caps. It is very important that you diversify your investments. I have been in market for over 25 years and I still continue to hold some of my stocks that I purchased 20 years ago. For one of my stock investment, the annual dividend is more than the initial investment I had made and it is already up 100x. I invest in this particular stock on a monthly basis via their dividend reinvestment program.