Gold Advances to Record on Weakening Dollar; Silver Tops $40

Gold rose, setting a record for the fourth time this week, as a weakening dollar boosted demand for the precious metal as an alternative asset and an inflation hedge. Silver climbed above $40 an ounce to a 31-year high. 

Gold rose to $1,476.40 an ounce in New York, the highest ever, after the dollar slid to the lowest level since December 2009 against a basket of six major currencies. Crude oil touched a 30-month high, and the European Central Bank yesterday raised borrowing costs from a record low to fight accelerating prices. 

“The Federal Reserve isn’t anywhere near an inflation fight as the ECB,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “Gold’s move is about the weakness in the dollar. Inflation is the buzzword, and it’s the impetus behind the trade.” 

Gold futures for June delivery rose $16.60, or 1.1 percent, to $1,475.90 at 4:37 p.m. in after-hours trading on the Comex in New York. The metal settled up $14.80, or 1 percent, to $1,474.10 at 1:39 p.m. in floor trading. For the week, the metal gained 3.2 percent, the most since May. Gold for immediate delivery in London climbed as much as 1.2 percent to a record $1,475.52. 

Silver futures for May delivery advanced $1.056, or 2.7 percent, to settle at $40.608. After the close of regular trading, the price touched $40.945, the highest since January 1980, the year futures reached a record $50.35. This week, silver advanced 7.6 percent, the most since February. 

The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for inflation, widened to as much as 2.64 percentage points, the most since March 2008. The Thomson Reuters/Jefferies CRB Index of 19 commodities rose to the highest since September 2008, led by gains in cotton.

ECB Raises Rates

The Fed has kept the benchmark rate at zero percent to 0.25 percent since December 2008 to stimulate growth. The ECB yesterday raised the main interest rate 25 basis points to 1.25 percent. 

“We just don’t hear anything about an inflation fight from the Fed,” Lesh said. “The Fed needs to move back to a neutral policy before they can even think of fighting inflation.” 

Gold extended gains after Congress and the President failed to agree on a federal budget. The dollar fell as much as 1 percent against the basket of currencies. 

“With the weakness in the dollar, the market is jittery about holding paper currencies and gravitating to the metals,” said Adam Klopfenstein, a senior market strategist at Lind- Waldock in Chicago. “The price of the metals reflects the chaos that will result from a lack of leadership from our Congressional leaders.”

Gold Over Dollars

Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, advised clients to sell sterling and buy gold. Earlier this week, Gartman encouraged investors to sell Japanese equities and buy the precious metal. 

“With the monetary base skyrocketing, and with the U.S. dollar falling, gold has to move higher,” Gartman said. 

Silver held in exchange-traded products rose 27.57 metric tons to 15,423.09 tons yesterday, the highest level since at least February 2010, data compiled by Bloomberg from four providers show. 

Investors perceive silver as “a cheap vehicle with characteristics similar to gold as a store of value,” Morgan Stanley said in a report to clients today. The metal will average $31.39 this year, up 20 percent from a previous forecast, the bank said. 

Palladium futures for June delivery rose $13.95, or 1.8 percent, to $794.20 an ounce on the New York Mercantile Exchange, after touching a one-month high of $804. Platinum futures for July delivery gained $21.50, or 1.2 percent, to $1,812.10 an ounce on the Nymex. Earlier, the price reached $1,822.10, the highest since March 7. 

Palladium rose 2.5 percent this week while platinum gained 2 percent. 

 

Source: Bloomberg By Pham-Duy Nguyen  

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Treasury 10-Year Notes Slide for Longest This Year as Inflation Bets Rise

Treasury notes fell for a third week, the longest slump for benchmark 10-year securities this year, as traders bet inflation will accelerate, oil reached $113 a barrel and gold climbed to a record. 

An inflation gauge used by the Federal Reserve reached the highest level in a month as minutes of the central bank’s last meeting showed policy makers differed over whether to begin removing record stimulus. Data next week is forecast to show the consumer price index rose in March. The Treasury will sell $66 billion of notes and bonds next week. 

“The Fed’s acknowledging increasing inflation expectations,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 20 primary dealers that trade with the central bank. “That’s putting more pressure on yields. Momentum is going to be for higher rates.” 

The 10-year yield rose 14 basis points, or 0.14 percentage point, to 3.58 percent, from 3.44 percent on April 1. It touched 3.61 percent, the highest level since Feb. 18. The 3.625 percent note due in February 2021 fell 1 1/8, or $11.25 per $1,000 face amount, to 100 3/8. Two-year note yields increased one basis point to 0.81 percent in their third weekly rise, the longest stretch since November. 

Thirty-year bond yields climbed 16 basis points, the most since the week ended Feb. 4, to 4.64 percent. They touched 4.67 percent yesterday, the highest level since March 9.

Treasury Auctions

Treasuries also slid as the U.S. prepared to auction $32 billion of 3-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three daily sales starting April 12. 

A bond-market measure of inflation expectations that the Fed uses to help determine monetary policy, the five-year forward inflation rate, increased to 3.01 percentage points, the most since March 8. The measure has averaged 2.78 percent over the past five years. 

“Anticipation of inflation data and Treasury supply next week are sending Treasury yields even higher,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. 

The likelihood the Fed will boost interest rates this year is 36 percent, and the chance of one in the first quarter of 2012 is 70 percent, Federal funds futures contracts showed. The central bank has held the benchmark rate at zero to 0.25 percent since December 2008 to support the economy.

Dollar Slumps

The Dollar Index, which InterContinentalExchange Inc. uses to track the greenback versus the currencies of six major trading partners, sank to as low as 74.838 yesterday, the least since December 2009, as U.S. lawmakers struggled to reach a last-minute budget deal to avoid a government shutdown. 

U.S. government debt gained 0.8 percent during the 21-day government closure at the end of 1995 and the start of 1996, Bank of America Merrill Lynch indexes show. 

Fed policy makers were divided last month over whether to begin removing stimulus this year as they debated the path of policy after the completion of a $600 billion bond-purchase program, according to minutes of the March 15 meeting released this week. They have differed since then in public statements. 

The Fed is “near a tipping point” and risks over- stimulating the economy and generating inflation, Dallas Fed President Richard Fisher said yesterday in Dallas to the Society of American Business Editors and Writers.

Atlanta Fed President Dennis Lockhart said the Fed should take its time in withdrawing economic stimulus amid moderate growth and a quickening of inflation that will probably prove temporary. The economy has “a halting and fragile quality,” he said in a speech yesterday in Knoxville, Tennessee.

‘Transitory’ Increase

Fed Chairman Ben S. Bernanke said on April 5 policy makers must watch inflation “extremely closely” for evidence that rising commodity costs are having more than a temporary impact on consumer prices. If inflation expectations are stable and the rise in commodities slows, “the increase in inflation will be transitory,” he said after a speech in Stone Mountain, Georgia. 

The yield gap between 10-year Treasury Inflation Protected Securities and conventional U.S. notes, a gauge of trader expectations for prices over the life of the debt, reached 2.66 percentage points, the most since March 2008. The measure reached 2.74 percent in 2006 prior to the U.S. recession. It averaged 2.08 percent over the past five years. 

The consumer price index accelerated to 2.6 percent in March from a year earlier, from 2.1 percent in February, economists in a Bloomberg News survey forecast before the Labor Department reports the data on April 15. The Fed’s preferred measure of inflation, which excludes food and energy, increased at an annualized 0.9 percent in February.

Crude Climbs

Crude oil for May delivery climbed above $113 a barrel in New York yesterday for the first time since September 2008 amid skepticism Libyan output will rebound when fighting ends and as a weaker dollar increased demand for raw materials. Gold reached $1,475.60 an ounce. 

Treasuries also fell this week as the European Central Bank raised its main refinancing rate by a quarter-percentage point from 1 percent, where it had been since May 2009. 

Six- and three-month bill rates dropped as the Treasury cut to $5 billion from $200 billion the amount of outstanding Supplementary Financing Program bills it sells on behalf of the Fed in a program to support the financial system. The reduction was made as the U.S. approaches its debt limit. 

Six-month rates tumbled to a record 0.1048 percent. Three- month rates slid to 0.0203 percent, the lowest level since December 2009. 

Treasury yields are below levels seen in the past decade even as government borrowing increases. Ten-year rates climbed as high as 5.53 percent in 2001 as traders speculated on when the Fed would finish cutting borrowing costs. The rate has averaged 4.12 percent over the past 10 years. 

Source: Bloomberg By Daniel Kruger

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Euro Gains as European Central Bank Raises Interest Rates Before Fed, BOJ

The euro rose to a 15-month high against the dollar as the European Central Bank increased interest rates for the first time since the financial crisis and amid concern the U.S. is debasing its currency. 

The dollar fell for a second week versus the euro as U.S. lawmakers remained in a stalemate on a federal budget and the Federal Reserve plans to buy Treasuries through June to support faster economic growth. The yen weakened as the Bank of Japan added to economic stimulus to help the nation’s economy recover from last month’s earthquake. Higher yielding currencies, such as the Australian dollar, strengthened as signs of global growth boosted demand for riskier assets. 

“The underlying demand for the euro, because of the continued dislike for the dollar, is unrelenting,” said Ray Attrill, a senior foreign exchange strategist at BNP Paribas SA in New York. “The risk is that we’ll see U.S. interest rates trending lower at the same time that we get more confidence about further rate hikes in the rest of the world.” 

The euro rose 1.7 percent to $1.4483 in New York, from $1.4237 April 1. It touched $1.4444, the highest level since January 2010. The yen declined 2.6 percent to 122.76 per euro, reaching 123.08, the weakest since May 2010. Japan’s currency lost 0.8 percent to 84.76 per dollar.

ECB Acts

The ECB raised its key rate by 25 basis points to 1.25 percent April 7. The increase was forecast by all the economists in a Bloomberg News survey. 

“We did not decide that it was the first of a series of interest-rate increases,” ECB President Jean-Claude Trichet said during a press conference in Frankfurt. “We will continue to do in the future” what is appropriate “to ensure price stability,” he said. 

The rate increase came less than 24 hours after Portugal said it would request financial aid from the European Commission, becoming the third euro-zone country to do so after Greece and Ireland. A rescue package for Portugal may be worth as much as 75 billion euros ($107 billion), two European officials with knowledge of the situation said. 

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback versus the currencies of six major trading partners, including the pound and Canadian dollar, sank to as low as 74.838, the least since December 2009. It lost 1.3 percent to 74.855, from 75.833 last week.

Spending Measures

Congress failed to reach an agreement on spending measures for the 2011 fiscal year as of 5 p.m. New York time. The deadline to reach a resolution was midnight. 

The ECB’s decision to raise its main rate came as the central banks of other developed nations, including the U.S. and Japan, keep borrowing costs near zero to support their economies as they recover from the financial crisis. The Fed isn’t expected to raise its target funds rate until the first quarter of 2012 and the Bank of Japan will probably keep borrowing costs on hold for the next 12 months, the median estimates in two Bloomberg surveys show. 

The U.S. central bank has purchased $512 billion of Treasuries since November as part of its plan to acquire $600 billion by June. 

“Improved risk sentiment on the back of the global recovery is pushing the euro higher against the yen and dollar, especially now the market is convinced there will be further rate increases by the ECB,” said Hitoshi Asaoka, senior strategist at Mizuho Trust & Banking Co. in Tokyo, a unit of Japan’s second-largest bank.

Weak Yen

The yen dropped for a fourth straight week versus the euro, the longest losing streak in 20 months, on speculation the BOJ will continue with accommodative monetary policy to help its economy recover from a record earthquake on March 11. The BOJ April 7 unveiled a 1 trillion yen ($11.8 billion), one-year loan program to companies affected by the quake and tsunami as board members downgraded their economic assessment for the first time since October. 

A magnitude-7.1 aftershock, one of the strongest since the devastating earthquake March 11, struck Japan April 7 215 miles northeast of Tokyo, the U.S. Geological Survey reported on its website. None of the nuclear facilities reported distress, according to official and news media reports. 

Brazil’s real posted the best performance among the 16 major currencies after the government enacted measures to curb its rally that were weaker than some investors expected, and Finance Minister Guido Mantega said long-term appreciation of the currency is “inevitable.” 

The real rose 2.4 percent to 1.5689 per dollar. The currency has gained 48 percent since the end of 2008.

Brazil Tax

The government has changed tax rules three times since March 29 in an effort to slow the two-year surge in the real that’s crimping exporters’ profits. Mantega said April 6 the currency’s strength was, to some extent, “inevitable” due to the economy’s growth as he announced the government was broadening the scope of a 6 percent tax on foreign borrowing to include loans with maturities of up to two years from one year. 

Australia’s dollar rose for a third week versus the greenback after statistics showed the unemployment rate fell to 4.9 percent in March from 5 percent the previous month. Employers added 37,800 workers in March from the previous month, the statistics bureau said. 

Australia’s dollar gained 1.7 percent to $1.0564, reaching $1.0584, the strongest since it was freely floated in 1983. 

Source: Bloomberg By Catarina Saraiva 

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Gold Jumps to All-Time High on Concern About Inflation, Weakening Dollar

Gold rose to a record in New York and London as a weaker dollar and concerns about inflation and European debt boosted demand for the metal as an alternative investment. Silver climbed above $40 an ounce to a 31-year high. 

The European Central Bank yesterday lifted interest rates for the first time in almost three years to quell inflation even as Portugal sought a bailout. The dollar slid to the lowest level since December 2009 against six major currencies. Gold, which typically moves inversely to the greenback, has climbed on fighting in Libya and Japan’s earthquake and tsunami last month. 

“Inflation expectations are rising,” Walter de Wet, an analyst at Standard Bank Plc in London, said today by phone. European debt issues are “certainly adding support. Most of the rally the past few days has been on the back of the dollar weakening.” 

Gold futures for June delivery gained as much as $15.20, or 1 percent, to $1,474.50 an ounce and traded at $1,472.80 by 8 a.m. on the Comex in New York. Prices are up 3.1 percent this week, the most since December. The metal for immediate delivery in London was 0.9 percent higher at $1,471.56 after reaching $1,473.07. 

Gold futures reached a record 21,320 rupees ($483.70) per 10 grams (0.3 ounce) on the Multi Commodity Exchange of India Ltd. The country is the biggest gold consumer.

Libyan Stalemate

U.S. Army General Carter Ham, who commanded the opening phase of the allied military operation in Libya, yesterday said the overall conflict is settling into a stalemate between regime forces and rebel fighters. North Atlantic Treaty Organization commanders are deploying more warplanes in their effort to halt forces loyal to Muammar Qaddafi. 

The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for inflation, widened to as much as 2.62 percentage points, the most in 33 months.

“Geopolitical risk in the Middle East and Africa, deepening inflation and the Black Swan risk of natural disasters” is boosting precious metals, GoldCore Ltd. analysts in Dublin said in an e-mail. “The gold and silver markets are experiencing a perfect storm. Debt concerns in the euro zone and in the U.S.” are supporting prices, the analysts said. 

President Barack Obama said he hopes lawmakers can reach a last-minute deal today to avert a government shutdown after a third round of talks with congressional leaders last night failed to end an impasse over the federal budget. 

Japan’s biggest aftershock since the March 11 earthquake yesterday left two dead and millions without power in the areas hit hardest by last month’s tsunami. The magnitude-7.1 temblor hindered efforts by Tokyo Electric Power Co. to prevent hydrogen explosions at its Fukushima Dai-Ichi nuclear plant.

Silver Surges

Silver for May delivery in New York climbed as much as 2 percent to $40.335 an ounce, the highest level since January 1980, the year futures reached a record $50.35. It last traded at $40.29. An ounce of gold bought as little as 36.48 ounces of silver in London today, the least since September 1983, data compiled by Bloomberg show. 

Silver held in exchange-traded products rose 27.57 metric tons to 15,423.09 tons yesterday, the highest level since at least February 2010, data compiled by Bloomberg from four providers show. 

Investors perceive silver as “a cheap vehicle with characteristics similar to gold as a store of value,” Morgan Stanley said in a report to clients today. The metal will average $31.39 an ounce this year, up 20 percent from a previous forecast, the bank said. 

Palladium for June delivery was up 2.7 percent at $801.35 an ounce after touching a one-month high of $804. Platinum for July delivery gained 1.6 percent to $1,818.70 an ounce. It earlier today reached $1,822.10, the highest price since March 7. 

Source: Bloomberg By Nicholas Larkin 

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Canada Dollar Rises to the Strongest Level Since 2007 as Oil Price Surges

Canada’s dollar appreciated to the strongest level in more than three years against its U.S. counterpart as crude oil, the nation’s largest export, rose above $111 a barrel for the first time since 2008. 

Canada’s currency briefly pared gains after a government report showed the economy unexpectedly lost jobs for the first time in six months in March. Oil rose as a fire burned at Libya’s Sarir field, bolstering concern that unrest in the region will further reduce supply. The U.S. dollar weakened against 14 of its 16 most-traded peers. Global stocks gained. 

“Equity markets are up, the U.S. dollar is weak and commodities are booming, which is a formula for Canadian dollar strength,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “Canada’s data numbers are the second story.” 

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, strengthened 0.3 percent to 95.50 cents per U.S. dollar at 9:39 a.m. in Toronto, from 95.82 cents yesterday. It touched 95.27 cents, the strongest since 2007. 

Crude oil for May delivery rose 0.8 percent to $111.20 a barrel in New York. It touched $111.90 a barrel, the highest since September 2008. Gold for June delivery surged to a record $1476.80 an ounce.

Raw Materials

 

The Thomson Reuters/Jefferies CRB Index of raw materials gained for the seventh consecutive day, increasing 0.5 percent. 

Raw materials, including oil and gold, account for about half of Canada’s export revenue. 

The MSCI World Index increased 0.6 percent, while the Standard & Poor’s 500 Index gained 0.3 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against six of its major trading partners including the Canadian dollar, fell to 75.061, the lowest level since December 2009. 

Employment fell by 1,500 last month, Statistics Canada said today in Ottawa. The number was lower than forecast by all 25 economists in a Bloomberg News survey that had a median estimate of a 28,000 gain. The unemployment rate declined to 7.7 percent from 7.8 percent as predicted, as the labor force shrank by 14,900 people. 

Canada’s dollar remained higher after the report as investors focused on the 90,600 gain in full-time work, the biggest since September 2009. The increase almost matched the 92,100 drop in part-time employment, which was the biggest in records dating to 1976. 

“There’s a broader trend of a weak U.S. dollar so the market was quick to dismiss Canadian employment,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. 

Canadian government bonds fell, pushing the yield on the benchmark 10-year note up four basis points, or 0.04 percentage point, to 3.47 percent. The price of the 3.5 percent security maturing in June 2020 dropped 27 cents to C$100.24. 

Source: Bloomberg By Alexandra Harris  

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Euro Falls From Four-Month High Reached on ECB Interest Rate Speculation

The euro fell against the dollar from the highest level in almost four months as European Union leaders failed to solidify a permanent bailout mechanism during a summit ended yesterday. 

Declines in the 17-nation currency this week were limited by speculation the European Central Bank will increase interest rates in April. The dollar fell against currencies linked to commodities, with the Australian dollar strengthening to the most versus its U.S. counterpart since foreign-exchange controls ended in 1983, before a report that may show U.S. private employers added 222,000 jobs in March. 

“EU leaders, they sound fairly optimistic no country after Portugal may need a bailout, but it’s too early to say that for sure and I don’t see any justification for euro to be up even this high,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “The market continues to have fairly good risk appetite, despite the turmoil going on.” 

The euro fell 0.7 percent to $1.4088 in New York, from $1.4182 in the week ended March 18. It touched $1.4220 on March 22 the highest level since Nov. 5. The shared currency fell to 114.59 yen, from 114.31. The dollar strengthened versus the yen to 81.34, from 80.58.

Euro Trends

The euro weakened 0.5 percent against a basket of nine- developed nation currencies in the past week, according to Bloomberg Correlation Weighted Indexes. Futures show traders added to bets on higher borrowing costs in the region, with the implied yield on the three-month Euribor contract expiring in September rising 0.2 percentage point to 1.83 percent. 

Jean-Claude Trichet, the ECB President, told the European Parliament March 21 he has “nothing to add” to his March 3 remarks when he said policy makers may raise the benchmark rate from a record low of 1 percent at their next meeting April 7. The Federal Reserve remains committed to keeping short-term interest rates low for an extended period. 

EU leaders were divided about how to get the euro-region stopgap fund up to its capacity of 440 billion euros ($624 billion) to ease credit woes. European leaders pushed back the decision on funding a bailout mechanism to June.

‘A Little Wary’

“European leaders have shown that in crisis times they can get things done,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “However, people are a little wary at this point.” 

Fitch Ratings cut Portugal’s credit rating after the nation’s Prime Minister Jose Socrates resigned March 23.

Two European officials said a bailout for Portugal may total as much as 70 billion euros. Portugal made up about 1.8 percent of the total 17-nation euro-zone gross domestic product in the fourth quarter last year, according to Eurostat, the EU’s statistics office, and Bloomberg data, while Ireland accounts for 1.8 percent and Greece makes up 2.3 percent. 

Portugal hasn’t asked for a bailout and the figures are preliminary, the officials said. The action would follow Greece and Ireland’s request of aid from the EU and the International Monetary Fund.

Dollar Index

The Dollar Index, which tracks the currency against six major trading partners, rose 0.6 percent to 76.151, from 75.718. The dollar fell on a weekly basis against the New Zealand, Australia, South African and Canadian currencies as the price of raw materials surged. 

The Reuters/Jefferies CRB Index jumped 2.2 percent, the biggest weekly gain since March 4.

Australia’s dollar rose as much as 0.8 percent to $1.0294 yesterday, as technical levels were triggered.

“There were a lot of orders sitting above the $1.0255-60 level and so when it broke the level a lot of stops were triggered and we saw a very very quick move,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York. Traders place automatic buy and sell orders, known as stops, at predetermined prices to limit losses. 

The yen fell for the first time in three weeks against the dollar in the week after the Group of Seven nations intervened to bring the currency down from a postwar high.

Yen Path

The yen surged to a post-World War II high of 76.25 versus the dollar on March 17 after a 9.0-magnitude earthquake and tsunami struck Japan on March 11, damaging cooling systems at a nuclear-power plant north of Tokyo. 

Switzerland’s franc fell against all its major counterparts last week. The move follows the franc’s biggest five-day gain versus the greenback since June, as investors sought a haven amid lingering tensions in the Middle East, according to the Swiss National Bank. 

The franc weakened 2.1 percent to 91.99 centimes per dollar, after gaining 3.1 percent the week ended March 18. 

“The franc was just overdone and now we’re seeing a move the other way,” said Tim O’Sullivan, chief trader at FOREX.com, a unit of the online currency trading company Gain Capital in Bedminster, New Jersey. “I still think it’s a good play to buy Swiss and sell dollars in this environment.” 

The pound fell against most of its major counterparts, excluding the franc, after the Bank of England minutes showed policy makers voted 6-3 to keep rates steady on March 10 and saw “merit in waiting” to assess the effect of higher oil prices on the economy. 

The currency was also pressured as Chancellor of the Exchequer George Osborne said the British economy will more grow more slowly this year than previously forecast. The Office for Budget Responsibility predicts annual growth in 2011 of 1.7 percent, down from the 2.1 percent forecast in November, Osborne said.

Britain’s currency fell 1.2 percent to $1.6042, from $1.6234 the previous week. 

Source: Bloomberg By Allison Bennett 

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Japan’s Recession Threat Lessens Following G-7’s Joint Intervention on Yen

Japan’s risk of becoming the first Group of Seven member to return to a recession after the global financial crisis eased as the G-7 intervened to halt the yen’s appreciation. 

The G-7’s yen sales sent the currency down the most since September, to 80.58 per dollar at the close yesterday in New York, compared with the postwar high of 76.25 reached March 17. Japan’s Vice Finance Minister Fumihiko Igarashi said in an interview “we confirmed” further intervention could be done. 

“The risks to the downside for Japan’s economy were reduced significantly by the G-7 intervention,” said Takuji Aida, a senior economist at UBS AG in Tokyo. “This coordinated action may help corporate sentiment to recover, a key factor in reviving growth, along with public spending.” 

Reduced scope for yen gains would limit damage to exporters’ earnings once companies from Toyota Motor Corp. to Sony Corp. restart factories. Focus now turns to the duration of electricity cuts in the aftermath of the nation’s record earthquake. At the crippled Fukushima Dai-Ichi nuclear power plant, engineers worked to restore power used for pumps needed to protect fuel rods from overheating and releasing radiation.

Paring Loss

The Nikkei 225 (NKY) Stock Average closed 2.7 percent higher yesterday, paring its slide since the disaster to 12 percent. The tumble in equities in the aftermath of the quake, in conjunction with the rising yen, threatened to impair companies’ balance sheets ahead of the March 31 close to the fiscal year. 

To aid companies with fund-raising concerns, Prime Minister Naoto Kan’s government may provide more than 10 trillion yen ($124 billion) of loans, the Nikkei newspaper reported without saying where it obtained the information. 

Japan’s economy, the world’s third biggest, may skirt a contraction and grow about 1 percent this year as the nation rebuilds after the March 11 temblor and tsunami, according to UBS and Nomura Holdings Inc. 

The Federal Reserve, European Central Bank, Bank of England, Germany’s Bundesbank, the Bank of France, the Bank of Canada and the Italian central bank said they joined the yen sales. A Japanese government official said on condition of anonymity that his country probably sold less than 2 trillion yen, the amount it used in its last intervention. Yesterday’s drop in the yen was the biggest since Japan’s unilateral sales on Sept. 15.

‘Very Problematic’

“The risk of the yen rising unchallenged to uncompetitive levels would have been very problematic in an economy where, outside of export dynamism, there’s really been very little dynamic for growth,” said Richard Jerram, head of Asian economics at Macquarie Securities Ltd. in Singapore. The intervention is “a significant help” to the economy, he said. 

Japan’s economy had already shrunk in the fourth quarter of 2010 as government stimulus measures adopted during the global financial crisis were phased out. The nation has suffered limited growth and sustained declines in consumer prices as an aging and shrinking population undercut domestic demand. 

Every one yen that the currency appreciates against the dollar erodes about 30 billion yen from Toyota’s earnings, according to the company. Honda Motor Co., which produces more than 70 percent of its vehicles outside Japan, loses 17 billion yen for each yen the currency strengthens. 

“We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake,” Igarashi said in the interview in Tokyo March 18. He added that he hoped the G-7 action would put a floor under the currency.

Yen’s Climb

The yen has appreciated 3 percent against the dollar since the close the day before the magnitude-9 quake. The currency, which has now strengthened 19 percent in the past two years, rose in recent days on speculation Japan’s insurers would repatriate overseas assets. Economic and Fiscal Policy Minister Kaoru Yosano has said there was no basis for such speculation. 

Nomura analysts see the economy expanding 1.1 percent this year, 0.4 percentage point less than their estimate before the disaster struck. The earthquake and tsunami ripped apart northeastern towns, killing thousands and damaging nuclear reactors at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. Almost 400,000 people remained in evacuation shelters yesterday. 

Soldiers and firefighters from Tokyo, using dozens of fire engines, doused sea water on reactor No. 3 yesterday, after an explosion this week. TEPCO also said it may finish reconnecting a power line to the No. 2 reactor. 

U.S. Optimistic 

Admiral Robert Willard, head of the U.S. Pacific Command, said he was cautiously optimistic that the damage can be contained and a “worst-case scenario will never be encountered.” 

The risks to an economic recovery include an uncertain power supply, with the nation facing rolling blackouts and Citigroup Inc. warning this week that the nation may face an “irreversible” blow to capacity. Household sentiment has also suffered. 

“Japan has little choice but to rely on exports as consumer spending will likely stay weak,” said Junko Nishioka, chief economist at RBS Securities. “Service consumption will likely slump even in the Tokyo area as consumers may be discouraged from going out because of the confusion resulting from the earthquake, such as the power shortage,” she said. 

Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year. 

The central bank yesterday repeated its pledge to pursue “powerful monetary easing” and added 3 trillion yen to the financial system, bringing its total emergency fund injections this week to 37 trillion yen. On March 14, it doubled an asset- purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts. 

Source: Bloomberg By Keiko Ujikane and Michael Heath 

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