Dollar slides before G20 but gold and oil rise

On Friday October 22, 2010

By Kevin Plumberg

HONG KONG (Reuters) – The dollar fell on Friday on speculation a U.S. plan that included letting undervalued currencies strengthen would gain support at a contentious weekend Group of 20 meeting, lifting gold and oil prices.

Major European stocks opened lower, with Britain’s FTSE 100 (FTSE:^FTSE  News) down 0.1 percent, France’s CAC 40 (Paris:^FCHI  News) down 0.5 percent and Germany’s DAX (XETRA:^GDAXI  News) off 0.3 percent. The FTSEurofirst 300 (^FTEU3  News) opened 0.1 percent lower.

A positive outlook from LG Display (034220.KS), the world’s No. 2 LCD flat screen maker, spurred a rally in shares in the technology sector and pushed up Asian stocks, which are headed for the first weekly decline in two months.

G20 nations should refrain from currency policies aimed at gaining a competitive edge and aim to keep trade imbalances contained, U.S. Treasury Secretary Timothy Geithner said in a letter to finance chiefs in the group who are meeting in Gyeongju, South Korea. Canada said it supported the proposals.

However, developing economies such as China may be cool to the idea of letting their currencies fly when the Federal Reserve is discussing a new round of quantitative easing.

For financial markets, at stake in the G20 meeting is whether to keep alive what has been a dominant trade since September of selling dollars to buy emerging market equities, commodities and longer maturity bonds. So far on Friday, dealers have been willing to add to the trade.

Citi’s currency strategists recommended adding to bets against the dollar ahead of the weekend.

“We believe that timing is right to add additional short USD exposure vs. EUR,” they said in a note. “Since we believe that apparent widespread expectation for coordinated action to manage the USD’s decline will not be met, we suspect that disappointment could translate into a further broad based decline in USD.”

The U.S. dollar index, which measures the dollar’s performance against a basket of six other major currencies, reversed early gains and fell 0.2 percent.

Dealers have spent most of the week taking profits on their bets on emerging Asian currencies, particularly after China raised interest rates for the first time since 2007 on Tuesday, sparking fears about the impact on growth.

The dollar is up 1.1 percent on the week against the Korean won and 0.9 percent against the Malaysian ringgit.


The main reason for the upward pressure on emerging market currencies has been that capital flows into these high-growth regions have been torrential since September, when expectations grew that the Fed will basically have to print dollars to buy more assets and pull down market rates.

Indeed, global emerging market equity funds absorbed a net $3.76 billion in new money while emerging market bond funds took in more than $1 billion in the week ended Oct 20, fund tracker EPFR Global said in a note. With more than two months to go until the end of the year, inflows to emerging markets have already exceeded 2009.

A prime example of hunger for exposure to emerging Asia was the pricing of the initial public offering of AIA, the Asian life insurance arm of American International Group Inc (NYSE:AIG  News), at the top of an expected range, according to sources.

“This is a cost effective way for IPO investors to ride China’s growth,” said Francis Gaskins, president of in Marina del Rey, California.

In the equity markets, Japan’s Nikkei share average edged up 0.4 percent in thin trade (Osaka:^N225  News), with prices driven higher by dealers closing out of bets against stocks.

The MSCI Asia Pacific ex-Japan index was largely unchanged on the day (^MIAPJ0000PUS  News), supported by a 1 percent climb in the technology sector while consumer staples and financials were drags.

LG Display (034220.KS) sparked some buying of the sector after it said the LCD industry was nearing a bottom as the pace of panel price falls slows, after reporting its worst profit in six quarters.

The MSCI index was on track for a 1.3 percent fall for the week, the first weekly decline since the week ended August 29.

Commodity traders pushed up oil prices 0.7 percent to $81.13 a barrel as the dollar fell, keeping an inverse relationship between the two assets tight. The 30-day correlation between the dollar index and front-month oil futures was 0.9, meaning the two have been moving in opposite directions.

Gold edged up 0.2 percent to $1,326.65 an ounce, though it has dipped significantly since hitting a record high of $1,387.10 last Thursday. The stable dollar and profit taking have pulled gold down 3.1 percent so far this week for what would be the biggest weekly decline since July.

(Additional reporting by Denny Thomas and Kennix Chim in Hong Kong)

Source: Reuters

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