Euro Rises Most Since September as Greece Wins Aid Package

The euro increased the most in seven months versus the dollar after Greece was offered a rescue package worth as much as 45 billion euros ($61 billion).

The common currency rose versus most of its major counterparts as yields on Greece’s bonds fell on reduced speculation the nation will default. Canada’s dollar traded near parity with its U.S. counterpart as Finance Minister Jim Flaherty said the loonie’s rise reflects the country’s good fiscal position.

“We saw a relief rally in the euro when the aid package to Greece was formalized,” said John McCarthy, director of currency trading at ING Groep NV in New York. “The deal took the pressure off the euro that had been building because of the Greek crisis.”

The euro increased as much as 1.4 percent to $1.3692, the highest level since March 18, before trading at $1.3587 at 4:06 p.m. in New York, compared with $1.35 on April 9. The advance matched an intraday rally on Sept. 8. The euro appreciated 0.7 percent to 126.68 yen, from 125.79. The dollar traded at 93.23 yen, compared with 93.18.

After Greek borrowing costs surged to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros in three-year loans in 2010 at about 5 percent interest. Another 15 billion euros would come from the International Monetary Fund. The three-year Greek bond yield fell 0.69 percentage point to 6.29 percent today.

‘Default Scenario’

“The package provides a funding structure and should temper the default scenario through the end of 2010,” said Tom Fitzpatrick, chief technical analyst at Citigroup Inc. in New York. “In the near-term perspective, the market has the bit between its teeth and to go against this move is not the right way to go.”

The euro will rally to at least $1.38 by the end of the week and will trade at $1.43 within three months as traders rush to cover bets that the euro will fall, according to Credit Suisse Group AG.

“We believe that the plan could drive a short-covering rally in the euro by reducing perceptions of credit risk in the euro area sharply,” Credit Suisse strategists including Ray Farris in London and Daniel Katzive in New York wrote in a note to clients today. A short is a bet a currency will fall.

Futures traders lowered wagers that the euro will fall against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed last week.

Bets Against Euro

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 67,223 on April 6, compared with net shorts of 85,326 a week earlier.

The committee responsible for determining when U.S. recessions begin and end said it’s too early to declare an end to the current slump.

“Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature,” the Business Cycle Dating Committee of the National Bureau of Economic Research said in a statement on its Web site.

The Canadian currency was little changed at C$1.0031 per U.S. dollar, erasing losses as a Bank of Canada survey showed the nation’s businesses expect sales growth over the next year.

The so-called loonie has gained 4.9 percent against the U.S. dollar this year and touched parity last week with its U.S. counterpart for the first time in almost two years.

‘Relatively Orderly’

The Canadian dollar’s appreciation “has been relatively orderly; it has not been particularly erratic,” Flaherty told reporters in Winnipeg, Manitoba. “It gives some comfort I think to business in Canada that they can deal with it.”

The Canadian central bank’s quarterly Business Outlook Survey showed 64 percent of executives said sales growth will quicken over the next year, while another 20 percent expect sales to slow, the Ottawa-based central bank said today.

Trading in currency options shows that emerging economies have become safer relative to developed nations than at any time in almost two years.

“The global perception of risk is changing,” said Jerome Booth, who helps manage $32 billion in emerging-market assets as the head of research at Ashmore Investment Management Ltd. in London. “Where you want to be is non-leveraged places, and that means anything in emerging markets. This is a start of a trend. The rally in emerging-markets has barely started yet.”

Brazil’s real will surge as much as 10 percent by July as its central bank raises interest rates to stem inflation, spurring purchases by global investors searching for higher yields, forecasts compiled by Bloomberg show. It advanced to 1.7548 versus the dollar today.

Emerging Currencies Overtake G-7 as Volatility Drops

raders in currency options are showing that emerging economies have become safer relative to developed nations than at any time in almost two years.

Three-month implied volatility for the seven biggest developing country currencies fell to 10 percent in March compared with 11.4 percent for industrialized nations, according to JPMorgan Chase & Co. indexes. The gap is the widest since July 2008. So far this year, eight of the 10 best-performing currencies are from emerging markets.

The record U.S. budget deficit, Europe’s bailout of Greece and the prospect of a hung parliament in the U.K. are increasing the risk of losses in dollars, euros and pounds. In developing markets, the deficit fell to one-third the level of advanced nations this year and the economies are growing twice as fast as the U.S., the International Monetary Fund says.

“The global perception of risk is changing,” said Jerome Booth, who helps manage $32 billion in emerging-market assets as the head of research at Ashmore Investment Management Ltd. in London. “Where you want to be is non-leveraged places, and that means anything in emerging-markets. This is a start of a trend. The rally in emerging-markets has barely started yet.”

Global Recovery

That’s a switch from three years ago, when record-low volatility was fueled by investors underestimating the risks of leverage. Now, volatility is declining in developing markets as countries from China to Brazil lead the global recovery, while swelling budget deficits in the U.K. and U.S. will weaken those nations’ currencies, Booth said.

Emerging-market currencies were mixed as of 12:01 p.m. in New York. Russia’s ruble rose 0.4 percent against the dollar to its strongest level in more than four months, while Hungary’s forint appreciated 0.7 percent versus the euro. The Thai baht weakened 0.3 percent against the dollar after a clash between soldiers and protesters left as many as 21 people dead.

The MSCI Emerging Markets Index of shares slipped 0.1 percent. The extra yield investors demand to own emerging-market debt over U.S. Treasuries was little changed at 2.42 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.

China’s imports surged 66 percent in March from a year earlier, causing the country’s first trade deficit since 2004. The increase in imports helps the global economic recovery, Huang Guohua, the head of the customs bureau’s statistics department, said on April 9.

Lira Rally

The Turkish lira has climbed 6.8 percent against the euro this year through April 9, reaching the strongest intraday level since December 2008. Gross domestic product increased at an annual rate of 6 percent in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations. Goldman Sachs Group Inc. forecasts the expansion may help Turkey’s $620- billion economy overtake Germany to become the third-biggest in Europe by 2050.

The implied volatility for the lira is below that of the pound by the most since 2000. The lira was forecast to fluctuate at an annual rate of 10.6 percent in the next three months, as of March 30, 2.7 percentage points less than the pound, data compiled by Bloomberg show.

“Dropping volatility says: ‘Buy, buy, buy,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

U.K. Budget

In the U.K., the pound is down 5 percent versus the dollar this year and has fallen against 14 of 16 most-traded currencies, including an 11.7 percent drop against the Mexican peso. National elections are raising the prospect that U.K. voters may fail to elect a governing majority for the first time since 1974. A weakened government may struggle to enact budget cuts with the nation’s debt set to almost double.

The euro has lost 12 percent versus the Mexican peso this year as Europe weighed options to help Greece avoid default on its debt. European governments offered Greece a rescue package worth as much as 45 billion euros ($61 billion) yesterday at below-market interest rates.

“Investors had a bit of a blasé attitude prior to the Greek situation,” said Robert Stewart, who oversees $74 billion as the head of currencies at JPMorgan Asset Management in London. “Investors are slowly awakening to the reality.”

Three decades ago, emerging-market currencies fluctuated the most amid debt crises and hyper-inflation. Mexico defaulted in 1982 while the Asian financial crisis that started in 1997 wiped out one third of the region’s economy.

U.S. Debt

Now it’s developed countries that are dealing with the biggest debt. The administration of President Barack Obama predicts its budget deficit will swell to a record $1.6 trillion in the fiscal year ending Sept. 30. Moody’s Investors Service forecasts that the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K.

Emerging nations are moving in the opposite direction. The budget deficit for developing countries will fall to 2.8 percent of their economies this year, from 4 percent in 2009, according to an IMF report in November. Industrialized governments’ budget gap will decline to 8.1 percent from 8.9 percent, the Washington-based fund said.

Developing nations reduced their foreign debt to 26 percent of GDP last year from 41 percent in 1999, while advanced nations’ debt may surge to 106.7 percent of GDP this year from 78.2 percent in 2007, according to IMF data.

Credit Crisis

In July 2007, the JPMorgan Emerging Market Volatility Index fell to a record low of 5.8 percent as central banks made their interest-rate and currency moves more predictable. When credit markets froze later that year, the index began rising and hit a record 35.8 percent in October 2008, one month after Lehman Brothers Holdings Inc. collapsed. The JPMorgan G-7 Volatility Index, including the euro, the pound and the yen, reached 26.6 percent.

Emerging-market volatility is falling again as the Mexican peso and the Malaysian ringgit gained 7.6 percent and 6.7 percent versus the dollar this year, the best performers in the world after the Costa Rican colon.

Mexico’s government forecasts it will keep the budget deficit at 2.8 percent of GDP this year after lowering spending and increasing taxes even as the economy shrank 6.5 percent in 2009 in its worst recession since 1932.

Mexican Peso

The implied volatility of the Mexican peso was 1.39 percentage points below that of the euro as of April 1, the most since October 2008, according to Bloomberg data.

Exports from Malaysia, South Korea and Taiwan are growing to feed demand in China, which is leading the global economic recovery. Overseas shipments from Malaysia rose 18.4 percent in February from a year earlier. The central bank has raised its growth forecast for Southeast Asia’s third-largest economy, predicting an expansion of as much as 5.5 percent this year, the fastest since 2007. Korea exports climbed 35.1 percent in March from a year earlier, while Taiwan’s surged 50.1 percent.

Investors may be overlooking the risks of developing- nations, said Harald Hild, a money manager at Quaesta Capital Optivest AG in Switzerland, which oversees about $1 billion. The South African rand, Colombian peso and Brazilian real have increased more than 20 percent in the past year against the dollar, making their exports more expensive. These countries are also “highly dependent” on the U.S. and may falter should America’s economic recovery stumble, he said.

“It’s really amazing how strong the risk appetite is for emerging-market currencies,” said Hild, who has traded currency options for 16 years. “I’m not sure how long this will hold.”

‘Strategic Trend’

Countries from Chile to China may lure $722 billion in overseas investment this year, 66 percent more than in 2009, the Washington-based Institute of International Finance said in January. Developing-nation bond funds attracted $7 billion this year, pushing assets under management to a record $74.7 billion, according to Cambridge, Massachusetts-based research company EPFR Global.

Falling volatility is making emerging-market currencies more attractive, especially to investors in carry trades, said Thanos Papasavvas, head of currency management at Investec Asset Management in London. In such trades, investors borrow in countries with low interest rates to buy financial assets in those with higher yields.

“You’ll see the appreciation of emerging-market currencies versus developed-market currencies as a long-term, strategic trend,” said JPMorgan’s Stewart. “Investors will allocate more to emerging markets.”

Brazil’s Real to Gain as Rate Rise Spurs Carry Trade

Brazil’s real will surge as much as 10 percent by July as the central bank raises interest rates to stem inflation, spurring purchases by global investors searching for higher yields, forecasts compiled by Bloomberg show.

The so-called carry trade, in which investors borrow in nations with low interest rates to buy higher-yielding assets, will help push the real to 1.6 per dollar by July from 1.7640 on April 9, according to UBS AG’s forecast, the highest among 16 compiled by Bloomberg. The median estimate shows the currency will rise to 1.75 per dollar by July, a 0.8 percent advance.

Interest rate futures contracts indicate traders expect the central bank to lift the benchmark rate by at least half a percentage point to 9.25 percent at its April 28 policy meeting and to 12.50 percent by May 2011. While Brazil’s 8.75 percent rate is a record low, it’s higher than near zero rates in the U.S., 1 percent in the euro-zone and 0.1 percent in Japan.

“The size of interest rate hikes in Brazil is so much bigger” than in developed economies, said Luis Fernando Lopes, a partner at Patria Investimentos, who helps manage 1.1 billion reais ($620 million) in assets in Sao Paulo. “It’s a whole other level. Only an external catastrophe could derail the appreciating trend in the real.”

The real gained 0.3 percent to 1.7580 per dollar at 2:34 p.m. New York time today, paring its drop this year to 0.8 percent. It climbed 33 percent in 2009, the best performance among 26 emerging-market currencies tracked by Bloomberg.

‘Ultimate Carry Trade’

“Brazil to me is the ultimate carry trade,” said Kevin Sollitt, head of foreign exchange at Paradigm Wealth Management in Cleveland, who helps manage $100 million in assets. “How can you short a currency with an interest rate close to 10 percent when the economy is on track to growth and the stock market is booming?,” said Sollitt, who forecasts the real will gain 7.6 percent to 1.64 per dollar by the end of this quarter.

The Bovespa stock index has climbed 3.5 percent this year, extending last year’s 83 percent gain, boosted by higher commodity prices and expectations gross domestic product will grow more than 5 percent this year, according to the median estimate in a Bloomberg survey of economists. The measure dropped 0.6 percent to 70,974.19 today.

Gains in the real may be limited if the government steps up dollar purchases to protect exporters, some investors say.

“The market knows the government becomes worried when the exchange rate approaches 1.75,” said Luciano Rostagno, chief Brazil strategist at CM Capital Markets, a Madrid-based brokerage.

Debt Sales

Brazil’s Treasury Secretary Arno Augustin said in January the nation may sell local debt to raise cash that can be used to buy dollars in the foreign-exchange market. In December, President Luiz Inacio Lula da Silva authorized the sovereign wealth fund to purchase dollars to create another government- related buyer of U.S. currency in addition to the central bank.

The central bank has bought dollars every day in the spot market since May 8, widening the country’s international reserves to a near-record $245 billion as of April 8.

Brazil plans to sell bonds in international markets in coming weeks, Augustin told reporters in Brasilia last week, adding that ratings agencies may raise the country’s debt grade.

The government may be less inclined to prevent gains in the real because of rising inflation, according to Patria’s Lopes.

‘Inflation Fight’

“A stronger real helps in the fight against inflation, which is not going well,” he said. “No one in the government will be pulling their hair out if the exchange rate goes beyond 1.7 per dollar.”

Annual inflation has accelerated for four months and has been above the central bank’s target of 4.5 percent in all three months of 2010. Consumer prices rose 5.17 percent in March from the same month a year earlier, the government’s statistics agency said last week.

The yield on the interest rate futures contract due in January 2011, the most traded on the Sao Paulo futures exchange, fell one basis point, or 0.01 percentage point, to 10.51 percent today, retreating from the highest level in three weeks.

Canada Dollar Trades Near Parity as Survey Reinforces Outlook

Canada’s dollar traded near parity with its U.S. counterpart after a Bank of Canada survey showed the nation’s businesses expect sales growth over the next year, adding to the evidence of an economic recovery.

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, pared earlier losses after the survey showed businesses plan the fastest price increases in more than a decade. Finance Minister Jim Flaherty said the loonie’s rise has been “orderly” and reflects the country’s good fiscal position.

“It’s a hugely important and useful survey, and it’s one that confirms that the recovery is intact,” said Eric Lascelles, chief economics and rates strategist at Toronto Dominion Bank’s TD Securities unit in Toronto. He forecasts the loonie will appreciate through parity to 98 cents by the end of the quarter.

The Canadian currency traded at C$1.0026 per U.S. dollar at 4:25 p.m. in Toronto, compared with C$1.0027 on April 9. It earlier weakened as much as 0.6 percent. One Canadian dollar buys 99.74 U.S. cents.

Government bonds were little changed.

Canada’s dollar, which has gained 5.1 percent against the U.S. dollar this year, achieved parity last week with its U.S. counterpart for the first time in almost two years.

‘Relatively Orderly’

The appreciation “has been relatively orderly; it has not been particularly erratic,” Flaherty, 60, told reporters in Winnipeg, Manitoba. “It gives some comfort I think to business in Canada that they can deal with it.”

The central bank’s quarterly Business Outlook Survey showed 64 percent of executives said sales growth will quicken over the next year, while another 20 percent expect sales to slow, the Ottawa-based central bank said today.

Forty-five percent of companies said they will charge more for their products, and 17 percent predicted slower price gains. The so-called balance of opinion was 28 percent, the highest level since the question was first asked in 1998.

“Responses to the spring survey provide further evidence that the recovery is taking hold,” the bank said.

Canada’s dollar earlier depreciated along with other commodity-linked currencies after the announcement of a rescue package for Greece’s economy boosted the euro.

Euro-region finance ministers said yesterday they would offer as much as 30 billion euros ($41 billion) in three-year loans in 2010 at around 5 percent. As much as 15 billion euros more would come from the International Monetary Fund. The euro touched a three-week high of $1.3692 against the greenback.

Interest Rates

The Canadian currency gained last week amid speculation the central bank will increase interest rates faster than the Federal Reserve.

The Bank of Canada will raise its overnight rate to 1.25 percent from a record low 0.25 percent by year-end, according to a Bloomberg survey. The Fed will increase its benchmark to 0.75 percent by then, from a current range of zero to 0.25 percent, another Bloomberg survey showed. The Canadian central bank next meets on April 20, and U.S. policy makers meet on April 28.

“The data that was released this morning by the Bank of Canada suggests that the growing probability of a rate hike in June,” said Stefane Marion, chief economist and strategist at National Bank Financial Inc. in Montreal. “The data right now is so strong that it would justify the Bank of Canada to move somewhat sooner, so that could help the Canadian dollar.”

Marion predicts the loonie will appreciate two cents past parity, and end the year back at 95 U.S. cents.

Bank of Canada Governor Mark Carney signaled last month he’s open to raising the key rate as soon as June 1 as inflation and growth outpace forecasts.

The 10-year Canadian note yield rose one basis point today, or 0.01 percentage point, to 3.66 percent. The price of the 3.75 percent security due in June 2019 declined 8 cents to C$100.71.

Canada’s government bonds have made investors 0.7 percent this year, according to a Merrill Lynch & Co. index.

Canada’s Dollar Trades at Parity for First Time Since July 2008

Canada’s dollar was worth more than the U.S. currency for the first time since July 2008 on the back of the rising price of crude oil and the prospect of higher interest rates.

Canada’s dollar, dubbed the loonie for the aquatic bird on the C$1 coin, last traded at par with the greenback on July 22, 2008, 11 days after crude, the country’s biggest export, reached a record $147.27 a barrel. Oil traded near a 17-month high.

“It’s a perfect storm for the Canadian dollar,” Jonathan Gencher, director of foreign exchange sales at Bank of Montreal in Toronto. “Canadian rates are higher and Canada will be moving before the Fed. Oil is higher. The fundamentals suggest we’ll hang around here for a while.”

The currency gained as much as 0.3 percent to C$99.92 per U.S. cents, and traded at C$1.0001 at 10:19 a.m. in Toronto, compared with from C$1.0022 yesterday. One Canadian dollar buys 99.98 U.S. cents.

The loonie traded on a one-for-one basis with the U.S. currency in September 2007 for the first time in three decades, capping a five-year run on the back of booming demand for the nation’s commodities.

Canada, the largest trading partner of the U.S., has benefited from rising demand for copper, gold, wheat and oil from the U.S. and emerging economies such as India and China. The country is the world’s largest producer of uranium, the second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East. Canada is also the world’s second-largest exporter of wheat.

Interest Rate Expectations

The strengthening Canadian currency makes it cheaper to import materials priced in U.S. dollars, according to Duncan Reith, senior vice president of merchandising in Toronto at Canadian Tire Retail, the nation’s largest auto parts and sporting goods retailer. “It’s helping us provide better value to our customers because we buy a lot of our product in U.S. dollars from the Pacific Rim,” Reith said.

Crude oil for May delivery was little changed at $86.70 a barrel on the New York Mercantile Exchange, after reaching the highest closing price yesterday since Oct. 8.

The central bank will boost its target overnight rate by 2 percentage points to 2.25 percent by the middle of next year, according to the weighted average of eight economists in a Bloomberg News survey of economists.

The six-month overnight index swap rate, a measure of the average overnight rate expected by traders during that time, rose to 0.5150 percent, near the highest level in more than a year. The central bank next meets on April 20 to determine monetary policy.

Deficit Projection

Canadian employers added 25,000 jobs in February, the third straight monthly gain, according to the median of 21 forecasts in a Bloomberg survey. Statistics Canada releases the report on April 9 at 7 a.m. in Ottawa.

Canada is on course to be the first Group of Seven nation to erase its budget gap after the global financial crisis. Finance Minister Jim Flaherty presented on March 4 a budget that forecasts the budget deficit narrowing to C$1.8 billion in 2014 from a record C$53.8 billion last year.

Fed Finds Record-Low OECD Inflation as ECB Shows Convergence

Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet can’t afford to let the economic recovery distract them from the danger of falling into a deflationary morass akin to Japan’s.

Core consumer prices, which strip out volatile food and energy costs, rose a record-low 1.5 percent in February from a year earlier in the 30 countries that form the Organization for Economic Cooperation and Development. Goldman Sachs Group Inc. economists see core inflation falling further later this year to about 0.3 percent in the U.S. and 0.2 percent in the euro area.

The disinflationary trend is driven by the slack built up during the global economic slump. The 1.9 percent growth in OECD economies that the Paris-based organization forecasts for 2010 still will leave their total output for the year 4.1 percent below potential. With that much excess capacity, companies will remain under pressure to cut prices to keep customers and reduce costs to bolster profit.

Policy makers have “gotten their eye off the immediate ball, which is deflation risk,” said Joseph Gagnon, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics in Washington. “It’s misguided for anybody to be talking about exiting” from stimulus during the next year.

Investors can profit from slowing inflation by selling Treasury Inflation-Protected Securities, Michael Vaknin, global fixed-income strategist for Goldman Sachs in London, said in a March 29 note to clients. The gap between yields on Treasuries and so-called TIPS due in two years, a measure of the outlook for consumer prices, stood at 1.56 percent on April 5, down from 2.92 percent on June 16, 2008.

Yield Curve Flattening

Vaknin also sees the U.S. Treasury yield curve flattening as long-term rates fall in tandem with inflation. The difference between yields on two and 10-year Treasury notes was 281.6 basis points on April 5.

Falling core inflation “suggests an on-hold type of stance for longer than was presumed in the past,” Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said in a March 25 interview with Tom Keene and Michael McKee on Bloomberg Radio. “And it does suggest, in terms of inflation currently, that bonds are a decent type of investment.”

Even so, bonds “have seen their best days,” Gross said, because, on an inflation-adjusted basis, interest rates are rising “rather dramatically” as the U.S. and other nations issue debt to cover large budget deficits and the Fed ends its mortgage buying and aid to the asset-backed securities market.

Bernanke Persuasion

Traders in the Chicago federal-funds futures market are betting there’s about a 52 percent chance Bernanke will persuade his colleagues to raise the benchmark interest rate to 0.5 percent or higher from near zero at the central bank’s Sept. 21 meeting.

Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, and Ethan Harris, head of North America economics at Bank of America-Merrill Lynch Global Research in New York, disagree. They don’t see the Fed changing the rate banks charge each other for overnight loans for the rest of this year.

Trichet’s ECB Governing Council convenes April 8 as Mark Wall, Deutsche Bank AG’s chief euro-area economist, and Janet Henry, HSBC Holdings Plc’s chief European economist, scrap forecasts for the refinancing rate to be raised this year from a record-low 1 percent. Both now expect the first increase since July 2008 to come next March.

‘Stay on Hold’

Major central banks “are going to stay on hold longer than otherwise, keeping zero rates or near-zero rates at least to the middle of next year,” Nouriel Roubini, a New York University professor and chairman of Roubini Global Economics LLC in New York, said in an interview.

Two years from now, “with core inflation well below target, a number of central banks will be in the odd position of seeking to boost inflation,” Harris said.

As Japan has learned to its cost during the last decade, deflation can be debilitating for an economy and difficult to escape. Faced with falling prices for their products, companies are unlikely to expand operations or add workers. Consumers are prone to delay purchases, hoping for better deals in the future.

Central banks can’t easily respond, because falling prices push up interest rates in real, inflation-adjusted terms, further reducing the willingness of businesses and households to borrow and spend.

Dow Chemical

Dow Chemical Co., the largest U.S. chemical maker, reported Feb. 2 that the prices it received on products sold worldwide in the fourth quarter of 2009 were 6 percent less than a year ago. Prices fell 17 percent for the full year, the Midland, Michigan- based company said.

Paris-based Lafarge SA, the world’s-biggest cement producer, said Feb. 19 that it expects its prices will fall in Spain as it anticipates a drop in sales volume there of as much as 15 percent.

Core consumer prices in the U.S. climbed 1.3 percent in February from a year ago, the smallest increase in six years, Labor Department data show. In the three months through February, they rose at an annualized rate of 0.1 percent.

Prices on 45.2 percent of the products and services covered by the government’s personal-consumption-expenditure price index -- everything from desktop computers to parking fees -- fell in February, according to calculations by the Federal Reserve Bank of Dallas.

‘Very Benign’

“The inflation data’s been very benign,” said Carl Lantz, head of U.S. interest-rate strategy in New York at Credit Suisse Group AG. “There’s not much indication from the TIPS market that there’s a longer-term inflation risk.”

Some European countries are already flirting with deflation after property bubbles burst, complicating the ECB’s ability to set a uniform monetary policy across 16 nations. Consumer prices in Ireland fell 2.4 percent in February from a year earlier on an EU harmonized basis, the 12th consecutive decline. They dropped seven times in Spain and 10 in Portugal during the past 12 months for which data is available.

While that may allow those economies to pivot toward greater external demand by making their goods more competitive, the risk is lower prices will hurt more than help by forcing up real wages and the cost of servicing debt, said Eoin O’Callaghan, an economist at BNP Paribas SA in London. He predicts falling prices will spread, and the euro-area’s core rate will be declining by next March after slowing to a record 0.8 percent this February.

Greatest Risk

Spyros Andreopoulos, a Morgan Stanley economist in London, says inflation, not deflation, poses the greatest risk now. Emerging markets including China and India are rebounding, central banks created a record amount of monetary stimulus, government debt is mounting and the recession undermined the productive capacity of economies, leading to lower output gaps than many people realize, he said.

“We might see inflation sooner than commonly anticipated,” Andreopoulos said. Morgan Stanley predicts the Fed will raise its key rate in the third quarter, with the ECB following in December.

Among developed economies, Canada already may be facing the challenge of inflation after its core rate unexpectedly accelerated in February by 2.1 percent. Bank of Canada Governor Mark Carney, whose economists in January predicted the core measure wouldn’t reach 2 percent until the third quarter of next year, signaled March 24 he’s open to raising his benchmark interest rate as soon as June from 0.25 percent.

Inflation Expectations

The threat elsewhere is that as prices sag, inflation expectations follow, prompting consumers and companies to retrench. Such a shift may fuel a deflationary spiral similar to the one that has plagued Japan, where the economy last year shrank to 474.2 trillion yen ($5.02 trillion), without accounting for price changes, the lowest level since 1991.

Japanese prices excluding food and energy fell 1.1 percent in February after a 1.2 percent drop in both January and December, the biggest since the government began keeping records in 1971.

The Bank of Japan last month doubled a credit program for commercial lenders to 20 trillion yen, a move Governor Masaaki Shirakawa said is aimed at lowering borrowing costs further to spur growth and prices. Its policy board meets today and tomorrow.

While global inflation also slid after recessions in the 1970s and 1980s, JPMorgan’s Kasman says what’s different this time is the “prospect for record-low levels of developed-world core inflation during the first year of an economic expansion.”

“Japan’s experience provides a cautionary tale of the damage that can be wrought if deflation takes hold,” said Kasman, a former economist at the Federal Reserve Bank of New York. “The current environment poses a unique challenge for central bankers.”

Treasury Yield Rise Slowed as Currency Reserves Grow

The fastest growth in global currency reserves since the credit crisis is blunting a rise in Treasury yields even as concern increases about record U.S. borrowing to finance an unprecedented budget deficit.

Worldwide reserve assets climbed 18 percent to $7.8 trillion in the 12 months ended in March, the biggest increase since the collapse of Bear Stearns Cos. in March 2008, according to data compiled by Bloomberg. Bank of America Corp. and Royal Bank of Scotland Group Plc forecast that growth in reserves, led by Asian nations, will sustain demand as Greece’s fiscal woes raise concern about the risk of holding sovereign debt and corporate bonds offer the slimmest yield premiums over Treasuries since November 2007.

The Obama administration is counting on foreign investors, who own half of the outstanding $7.4 trillion in marketable Treasury debt, to continue buying while the Federal Reserve begins a shift in monetary policy. Former Fed Chairman Alan Greenspan and Pacific Investment Management Co.’s Bill Gross have said that yields will rise, lifting borrowing costs and reducing demand for Treasuries, as the U.S. borrows record amounts to support an economy emerging from the worst contraction since the 1930s.

“If you go into Treasuries you’ll be winning because of the rising dollar, even if yields rise,” said Christoph Kind, head of asset allocation at Frankfurt Trust in Frankfurt, which manages about $20 billion. “There was a lot of speculation about Asia diversifying away from the dollar, but I think there is a bit of frustration from what happened to the euro after the Greek crisis.”

Dollar Market Share

The U.S. dollar’s share of global currency reserves rose to 62.1 percent in the fourth quarter of 2009 while the euro’s share dropped to 27.4 percent, the International Monetary Fund said March 31 in a quarterly report. The two-year Treasury yield rose 0.19 percentage point to 1.14 percent and the dollar advanced 2.2 percent to $1.4321 per euro during the period.

Interest-rate futures traded at the CME Group exchange show that expectations for an increase in the central bank rate by November have risen to 71 percent from 62 percent a month ago. Of the 18 primary dealers that serve as counterparties to the Fed in open market operations, 10 are forecasting an increase in the central bank’s target rate by the end of the year.

International Reserves

Global reserves rose 10 percent to $8.09 trillion in 2009, IMF data show. Bank of America and RBS Securities forecast worldwide reserve growth to lead to increased demand for U.S. assets including Treasuries as investors seek markets where securities are most easily traded.

“A lot depends on what China does, but based on what we’ve seen so far I think you have to think reserves are going to grow something on the order of 5 to 10 percent globally,” said Robert Sinche, chief strategist at Lily Pond Capital Management LLC in New York.

History suggests foreign investors including China, the largest U.S. creditor, will be buyers as the narrowing advantage in yield on investment-grade corporate debt or mortgage-backed securities makes Treasuries more attractive. China’s largest increases in purchases have come during the month where the 10- year Treasury yield peaked in three of the last four years.

Yields on 10-year notes, the benchmark for everything from mortgages to corporate bonds, reached 4 percent yesterday for the first time since June. At the same time, data last month showed that foreign holders added Treasuries for a ninth consecutive month as the global economy recovered. The U.S. will sell $2.43 trillion of notes and bonds this year, according to 10 primary dealers in a Bloomberg News survey.

Currency Manipulation

A portion of China’s Treasury purchases have been made in order to maintain the linkage of the value of its currency, the yuan, with the dollar. China tightened the relationship in July 2008 as the financial crisis worsened after allowing the yuan to float within a band in July 2005.

Treasury Secretary Timothy F. Geithner said April 3 that the U.S. would delay a report on global currency policies scheduled for April 15, and urged China to move toward a more flexible currency. The decision came days after Chinese President Hu Jintao announced plans to visit Washington for a nuclear summit April 12-13.

Geithner faces demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years.

‘Huge Overhang’

Bond dealers forecast the yield on the 10-year note will climb to 4.2 percent at the end of this year, according to the median estimate in a survey by Bloomberg News. That’s still lower than the 5.46 percent average over the last 20 years. The yield declined 4 basis points to 3.95 percent at 10:36 a.m. in New York, according to BGCantor Market Data.

“Bonds have seen their best days,” Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said in a March 25 interview with Tom Keene on Bloomberg Radio from Pimco’s headquarters in Newport Beach, California.

Higher yields are the “canary in the mine,” Greenspan said in a March 26 interview on Bloomberg Television’s “Political Capital With Al Hunt.” The increases reflect concern over “this huge overhang of federal debt which we have never seen before,” he said.

Yield Spread

The difference in yield between Treasuries and investment grade corporate bonds has narrowed to 1.59 percentage points, the lowest since November 2007, from a high of 6.56 percentage points in November 2008, according to Bank of America Merrill Lynch index data. Mortgage spreads have narrowed from 1.92 percentage points in December 2008 to a yield 0.02 percentage point below Treasuries in November as the Fed ended its $300 billion program of Treasury purchases while continuing its $1.25 trillion operation to buy mortgage securities. The buyback of mortgages was completed last week.

China bought $114.3 billion of Treasuries in June 2009, the month the 10-year Treasury yield touched 4 percent; $69.8 billion in June 2007, when the yield hit a five-year high of 5.32 percent; and $47.8 billion in June 2008 as the yield reached 5.25 percent.

“They are buying when the market is weak,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey, and is a former official at Singapore’s central bank.

China may widen the yuan’s trading band against the dollar in the second quarter to as much as 2 percent, up from 0.5 percent, allowing the currency to resume appreciation to help curb inflation, according to UBS AG.

Geithner on China

The U.S. strategy is “designed to increase the odds that China does decide to do what’s in their interest, which is to let their currency start to move up again, and that’ll be part of making sure we have a more healthy global recovery in place,” Geithner said during an April 2 interview with Bloomberg Television in New York.

Treasury purchases may continue should China allow its currency to appreciate because “when the private sector realizes that Asian currencies will be allowed to appreciate capital flows might increase,” said Stephen Jen, managing director of macro and currencies, BlueGold Capital Management LLP in London. “It’s not clear whether reserve accumulation will be more or less with more currency movement. Asian central banks will still need to be major purchasers of U.S. assets in the order of what we’ve seen in recent years.”

‘Out the Curve’

China increased its holdings of notes and bonds in January while letting a portion of its record bill holdings acquired during the financial crisis mature. Notes and bonds owned by China rose 0.8 percent to $831.4 billion, while bill holdings dropped 17 percent to $57.6 billion, according to the latest Treasury Department data.

Japan, Switzerland, India and Canada have also been buying Treasury notes and bonds even as their positions in Treasury bills maturing in a year or less have declined. Foreign investors’ holdings of bills reached a peak at $607.3 billion in August and have since declined 16 percent to $508.5 billion, Treasury data show.

Foreign investors in Treasuries are taking increasing amounts of interest-rate risk on the debt rather than seeking out higher yields with corporate bonds as some concerns remain that U.S. policy makers led by President Barack Obama and Federal Chairman Ben S. Bernanke have not cleared the final hurdles in efforts to stabilize the economy, said Priya Misra, head of U.S. rates strategy at Bank of America in New York.

“You’ve seen the healing of the credit markets, issuance has come back in credit,” Misra said. “We all would have all expected them to move into spread product. Instead it’s moved out the Treasury curve.”

Philadelphia Sells Debt as Muni Issuance Rises From Low of 2010

Philadelphia and Illinois are scheduled to join municipalities issuing a combined $5.1 billion of bonds this week as sales rebound from the slowest week of the year.

State and local governments sold $4.4 billion of debt last week, the least since December, according to data compiled by Bloomberg. Yields on most tax-exempt maturities rose the past two weeks, with the 10-year touching an almost nine-month high, according to Municipal Market Advisors. Rates on taxable Build America Bonds climbed the past three weeks and are close to the highest in two months.

Build America debt, created last year as part of the federal economic stimulus package, accounted for $26 billion of the $97 billion of municipal sales in the last three months, according to Bloomberg data. Issuers of the debt get a 35 percent subsidy toward interest costs.

“The demand on the taxable side is extremely large,” said Christopher Mier, a municipal strategist at Chicago-based Loop Capital Markets. “You’re drawing in every type of taxable buyer, including foreign financial institutions.”

International investors bought 30 percent of California’s $3.4 billion taxable sale in March. Foreign buyers boosted their U.S. municipal holdings by about 50 percent, to $60.6 billion, in 2009, according to Federal Reserve data.

The average yield on the Wells Fargo Build America Bond Index was about 6.31 percent on April 2, 1 basis point below a two-month high of 6.32 percent set March 25. A basis point is 0.01 percentage point. Top-rated, 10-year tax-exempt securities yielded 3.23 percent, the highest since July, according to a daily survey by Concord, Massachusetts-based MMA.

‘Timing Is Good’

Illinois will offer $356 million in taxable debt this week, including Build America Bonds. The securities are part of $1.056 billion of debt that will help rebuild transportation and school infrastructure, said John Sinsheimer, Illinois director of capital markets, in an interview.

“We think the timing is good,” Sinsheimer said. “The market is understanding the Build America Bonds; they’re attractive to foreign investors.”

This week’s issuance calendar, which will include $4.2 billion in tax-exempt bonds and $895.6 million in taxable debt, still ranks among the three slowest this year. Diminished supply will help buoy the muni market, said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia.

“There’s going to be some decent demand and not much supply, and you could start to see muni yields outperforming” Treasuries, he said.

Reduced Supply

Ten-year municipal debt yields about 83 percent of equivalent-maturity Treasuries as of last week, up from this year’s low of about 79 percent, touched in January, according to Bloomberg data. Municipal yields have dropped in part as issuers turned to Build America Bonds, reducing tax-exempt supply. The government subsidizes part of the interest if states and local governments use the taxable bonds for public works.

Fitch Ratings will begin to shift its municipal grading scale today to make the ratings more comparable with corporate debt. State and local general obligations rated A to BBB- will be adjusted two levels higher and those rated A+ or more will be raised one level, the company said last week. Moody’s will begin doing so later this month.

“People that won’t buy anything rated below A are going to have more choices,” Schankel said. “This will help munis and perhaps lower overall yields a little bit, even though it’s not technically a credit improvement.”

Philadelphia, the lowest-ranked city among the 10 most- populous in the U.S., will offer $391.3 million in tax-exempt revenue bonds. The issue will be used to refund prior debt owed by the city’s water department.

Following are descriptions of pending sales of municipal debt in the U.S.:

THE CONVENTION CENTER AUTHORITY OF NASHVILLE AND DAVIDSON COUNTY plans to sell $633.3 million in bonds this month to help fund a new convention center in the capital city. The securities will be backed by tourism tax revenue. The issues will mature from 2019 through 2043. Goldman Sachs Group Inc. will market the sale. The bonds are rated Aa3 by Moody’s, A+ by Fitch and A by S&P, the fourth- and sixth-highest investment grades, respectively. (Added April 5)

MASSACHUSETTS DEPARTMENT OF TRANSPORTATION, created last year in a merger of state agencies, plans to sell $592.3 million of variable-rate demand obligations as soon as this week to match an interest-rate swap tied to its debt, according to a preliminary official statement. It sold $261.2 million of fixed- rate securities to lower its borrowing costs this week. The bonds were originally sold in 1997 and 1999 by the Massachusetts Turnpike Authority to finance Boston’s $14.9 billion “Big Dig,” the largest public works project in U.S. history. The subordinated bonds are secured by turnpike tolls and other revenue, such as state aid, and were rated AA-, fourth-highest, by Fitch on March 16. (Updated April 5)

Treasury 10-Year Yield Approaches 4% After ISM, Home Sales Data

Treasury 10-year note yields approached 4 percent for the first time since June as reports on U.S. service industries and pending home sales added to signs the U.S. economic recovery is gaining traction.

Ten-year yields rose for a third day as the Institute for Supply Management’s gauge of non-manufacturing businesses expanded in March at the fastest pace in almost four years and pending home sales last month gained the most since October 2001. The U.S. will sell $8 billion in inflation-indexed notes.

“The data shows that the economic recovery has momentum and the Treasury market is starting to price that in,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers required to bid at Treasury auctions. “Rates should head higher into the auctions. Investors are trying to figure out what might get us over that 4 percent hump. If data continues to surprise to the upside, that could happen soon.”

The 10-year note yield rose 5 basis points, or 0.05 percentage point, to 3.99 percent at 10:48 a.m. in New York, according to BGCantor Market Data. That’s the highest level since June 11. The 3.625 percent security due in February 2020 fell 13/32, or $4.06 per $1,000 face value, to 97 2/32.

The ISM’s index non-manufacturing businesses, which make up almost 90 percent of the U.S. economy, rose to 55.4 in March from 53 the prior month. Readings above 50 signal expansion. U.S. pending home sales gained 8.2 percent in February from the previous month.

Debt Sales

Today’s auction of 10-year Treasury Inflation-Protected Securities is the first of four note and bond sales this week totaling $82 billion. Ten-year notes fell the most since December the week of March 27, when the U.S. sold $118 billion of 2-, 5- and 7-year debt.

Demand for U.S. debt was below forecasts at the Treasury’s last series of auctions, sparking concern that record spending is damping investor interest.

“The market is starting to react to growing fiscal deficits,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. “The last round of weak auctions are still fresh on everyone’s mind. This week’s auctions will be telling to see if sponsorship continues to decline.”

President Barack Obama and congress have increased U.S. marketable debt to a record $7.41 trillion to fund spending programs and service a deficit that his administration projects will probably expand to $1.6 trillion this year. Last year’s deficit was a record $1.4 trillion.

Four Percent Test

The yield on 10-year notes, which move inversely to prices, rose eight basis points on April 2 after the Labor Department reported U.S. companies added 162,000 workers in March, after a loss of 36,000 in February.

“A test of 4 percent is likely in the coming days,” Stamford, Connecticut-based William O’Donnell and Aaron Kohli, strategists at Royal Bank of Scotland Group Plc, wrote in a research note. “Look for a push back to upper yield ranges.”

Traders added to bets the Federal Reserve will raise interest rates after a report last week showed the fastest employment growth in three years.

Futures on the CME Group Inc. exchange show a 62 percent chance the Fed will increase the target for overnight lending between banks by at least a quarter percentage point by November, compared with 58 percent odds a month ago.

Discount Rate

The Fed Board of Governors may raise the discount rate to 1 percent from 0.75 percent at a meeting today, Andy Brenner, global head of emerging market fixed income at New-York based brokerage Guggenheim Capital Markets, wrote in a note to clients.

The board last increased the rate, which it charges to banks for direct loans, on Feb. 18, when it raised by a quarter percentage point to 0.75 percent. It said the move would encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.

“Last week’s more positive data, the worry about this week’s supply and then potential that the Fed increases the discount rate today all add to continued bearish sentiment in the Treasury market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Still, the prices have changed, but the underlying facts haven’t. The market should cheapen up some for the auctions, so we are buyers after the auction process.” Treasury 10-year notes will be attractive around 4.06 percent, Lyngen said.

Investors bid for 2.65 times the amount of 10-year TIPS offered at the last sale of the securities on Jan. 11, versus the average of 2.31 times at the past 10 auctions. Indirect bidders, which include foreign central banks, purchased 40.7 percent of the securities, versus the 10-sale average of 39 percent.

TIPS about broke even in March, while conventional Treasuries handed investors a 0.9 percent loss, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit.

Argentine Debt Swap to Open Financing for Provinces: Week Ahead

Argentina’s planned restructuring this month of $20 billion in defaulted debt will open the way for the country’s 23 provinces to sell bonds as they struggle to cover rising financing needs, Standard & Poor’s said.

The exchange will enable the national government to tap international debt markets for the first time since 2001, making it easier and cheaper for provinces to issue bonds locally and abroad, said S&P analyst Sebastian Briozzo. Speculation the government is nearing completion of the swap drove down Argentina’s borrowing costs by the most in six months in March, with the extra yield investors demand to own the country’s debt instead of U.S. Treasuries sinking 1.60 percentage points.

Provincial financing needs will jump to 26 billion pesos ($6.7 billion) in 2010 from 18.5 billion pesos last year, said Veronica Sosa, an analyst at Buenos Aires research company Economia y Regiones. The local governments’ deficit will swell to 13 billion pesos this year, equal to 0.8 percent of gross domestic product, from 9 billion pesos in 2009, she said. The finances have deteriorated to such an extent that Buenos Aires is paying for some goods and services with promissory notes.

“Giving bonds to suppliers is one of the first things that provinces do when they have liquidity problems,” Briozzo said in a March 30 telephone interview in Buenos Aires. “The situation will continue to deteriorate, but at the same time you’re not talking about deficits that are impossible to finance if the market opens up.”

Argentina will present its final offer to defaulted debt holders on April 14, Economy Minister Amado Boudou said last week.

Bond Yields

Buenos Aires, which accounts for more than a third of the nation’s economy, plans to sell at least $500 million of bonds overseas once the nation’s restructuring is completed, said Felisa Stangatti, a spokeswoman at the provincial Economy Ministry in La Plata. The province’s 2010 budget authorizes the sale of as much as $1.1 billion in local and overseas bonds.

“Yields are going to drop after the swap,” she said in a March 19 interview.

Yields on Buenos Aires’s benchmark dollar bonds also have declined on the prospect the country will restructure its defaulted debt. The yield on the province’s $475 million of 9.375 percent bonds due in 2018 tumbled 3.8 percentage points in March to 13.91 percent, according to Bloomberg data.

Financing Needs

Argentine dollar bonds yielded 6.4 percentage points over Treasuries on March 30, the smallest gap since Jan. 4, according to JPMorgan Chase & Co. The spread was 6.46 points on April 1.

Besides Buenos Aires, the provinces of Mendoza, Neuquen, Cordoba and Santa Fe are among the few regional governments with the management capacity and economic scale to issue bonds abroad, Briozzo said.

Cordoba plans to sell as much as $350 million of bonds overseas this year, according to Alejandro Henke, executive director of Banco de Cordoba, which is owned by the province.

Wages will climb an average of 20 percent this year and account for about 55 percent of provinces’ budgets, according to Economia y Regiones.

Provincial deficits, financed through bond sales and the use of promissory notes and scrip, contributed to Argentina’s record $95 billion default in 2001. Eleven regional governments were printing their own currencies that year.

Promissory Notes

In January and February, Buenos Aires province paid for 850 million pesos of goods and services with 12-month notes, Stangatti said. Another 600 million pesos of bills will be settled the same way by the end of the year, she said.

As many as five provinces may follow Buenos Aires in making payments with notes or other kinds of debt, Economia y Regiones’ Sosa said in a March 16 phone interview.

Rio Negro, in the southern region of Patagonia, may pay suppliers with peso-denominated promissory notes due in 2026 as its budget gap widens to 240 million pesos this year, or 2.7 percent of its GDP, from 150 million pesos in 2009, the province’s Treasury Secretary Ricardo Gutierrez said in a March 18 telephone interview.

Gutierrez declined to say how much of the notes, which will pay interest equivalent to the central bank’s interbank rate, may be issued. They won’t be used to pay salaries, he said.

Tax Sharing

At the other end of the country, Corrientes may be forced to use notes because the central government hasn’t transferred 90 million pesos due under a national tax-sharing regime, Governor Ricardo Colombi said in a statement posted on his province’s Web site on March 10.

Opposition Senator Ruben Giustiniani, who is sponsoring a bill to increase the provinces’ share of a tax on financial transactions, said last month that the portion of national tax revenue the federal government keeps for its own uses has risen to 75 percent from 50 percent five years ago.

Fernandez opposes the proposal, saying on March 15 that it would cost the federal government 10 billion pesos a year.

“If they remove federal funds from one place, they will have to explain which funds the government will have to cut,” Fernandez, 57, said in a speech in Ushuaia, a city on the southern tip of Argentina. “Public works? Universities? Pensions?”

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 was little changed at 11.44 percent, according to JPMorgan. The peso weakened 0.3 percent to 3.8788 per dollar. The Merval stock index slid 2.7 percent to 2,373.71.

The following is a list of events in Argentina this week:

Event                                        Date
Car Sales (March)                          April 7
Tax Revenue (March)                        April 5
(tentative)
Basket of Basic Goods (Feb)                April 8

Obama, Hu Talks May Let China Avoid Currency Manipulator Brand

President Barack Obama urged China to help balance global growth as strategists said President Hu Jintao’s decision to visit Washington this month increases the likelihood his nation will escape being branded a currency manipulator by the U.S.

Ties between the two countries may be mending after a year marked by disagreements over the yuan’s value, U.S. arms sales to Taiwan and Google Inc.’s decision to pull out of China. In an hour-long call yesterday, Obama sought Hu’s support for Group of 20 pledges to sustain the global economic recovery and for cooperation to help stop Iran from developing nuclear weapons.

Obama “emphasized the importance of the United States and China along with other major economies implementing the G-20 commitments designed to produce balanced and sustainable growth,” the White House said late yesterday in a statement.

Hu’s presence at this month’s nuclear summit improves the chances China won’t be labelled a manipulator when the U.S. Treasury releases its biannual report on exchange rates, said China International Capital Corp., a Beijing-based investment bank that’s part-owned by Morgan Stanley.

U.S. Treasury Secretary Timothy F. Geithner is under congressional pressure to make such a ruling after China kept the value of the yuan unchanged against the dollar for almost two years. Critics say that gives Chinese exporters an unfair advantage.

The Treasury is scheduled to release its report April 15. The New York Times reported today that it may now delay publication. Treasury spokeswoman Natalie Wyeth declined to comment.

Rhetoric Shift

“In the past few weeks, rhetoric has turned sour from both sides, but this development is one of the initial signs” relations are thawing, Hao Hong, Beijing-based global equity strategist at CICC, said in an e-mailed response to queries.

Yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Twelve-month non-deliverable forwards advanced 0.2 percent to 6.6491 per dollar as of 5:30 p.m. in Hong Kong, reflecting bets the currency will strengthen 2.7 percent from the spot rate of 6.8256, according to Bloomberg data.

New York University professor Nouriel Roubini said last week the U.S. and China are on a “collision course” over the Chinese currency and investors are underestimating the disruptions for global financial markets. Avoiding the manipulator tag may give China further scope to let the yuan gain to ease inflation pressures in its economy.

China’s Growth

“The latest development should make it more likely for Beijing to start moving away from the renminbi’s current de facto peg within the next few months, if not weeks,” Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in a report yesterday. “Since China is growing much faster than most of its trading partners, keeping the de facto peg for too long will only invite more protectionism.”

The Treasury hasn’t labelled any country a currency manipulator since 1994. Five U.S. senators, including Charles Schumer, a New York Democrat, and South Carolina Republican Lindsey Graham, last month introduced legislation to make it easier for the U.S. to declare foreign-exchange misalignments and take corrective action.

Any delay in the report would not be rare given Democratic and Republican Treasury departments historically have released it at their convenience. In January 1999, President Bill Clinton’s Treasury even published a compendium of those that had been due in 1997 and 1998 and President George W. Bush’s administration also repeatedly missed the deadline.

Asset Bubbles

China’s central bank said today that asset bubbles are emerging in parts of the world and in certain industries that may burst unless supported by real economic recovery. Chinese growth in the fourth quarter reached 10.7 percent.

Rapid asset-price increases in major markets since 2009 have been pushed by “ultra-loose” monetary policies by governments around the world and “don’t mean real economies have recovered or will recover strongly,” the People’s Bank of China said in a report posted on its Web site today.

China pegged the yuan at about 8.3 per dollar from 1995 until July 2005, when the government shifted policy and allowed some fluctuation by managing its exchange rate against an undisclosed basket of currencies. After a 21 percent gain in the currency that hurt its exporters, China in July 2008 began restraining the yuan’s value.

If China doesn’t change tack it may face broader pressure to do so after French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown this week joined Obama in saying the G-20 should take currencies into account in efforts to deliver balanced global growth. G-20 finance ministers and central bankers are also scheduled to meet in Washington this month before a June summit of leaders in Toronto.

Euro May Fall to 13-Month Low on Dead Cross: Technical Analysis

The euro may drop to a 13-month low of $1.2457 should it complete a so-called dead-cross formation, Tokai Tokyo Securities Co. said, citing trading patterns.

A chart of the 16-nation currency shows its 20- and 90-week moving averages are falling toward the 200-week indicator, suggesting a dead cross pattern will be created, said Yoh Nihei, Tokyo-based trading group manager at Tokai Tokyo. A dead cross appears when a short-term average drops below a longer-term one and signals a security is poised to extend losses.

“The euro may dip below $1.30 and test lower prices,” Nihei said in an interview yesterday. An ichimoku chart also indicates “the euro is still in a downtrend,” he said.

The euro traded at $1.3581 as of 8:08 a.m. in Tokyo after declining from last year’s high of $1.5144 in November. The currency slid 5.7 percent against the dollar last quarter, the biggest three-month drop since September 2008.

As the euro weakens, it is likely to encounter levels of support at $1.3268, $1.3091 and $1.2457, Nihei said. Support refers to an area where buy orders may be clustered.

The first support level represents the euro’s lows from March 25 and 26, which was the weakest since May. The second and third levels represent 76.4 percent and 100 percent Fibonacci retracements of the currency’s advance from $1.2457 on March 4, 2009, to $1.5144 on Nov. 25, Nihei said.

Fibonacci analysis is based on a theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance, or below support, indicates a currency may move to the next level. An ichimoku chart predicts future trends by analyzing the midpoints of historic highs and lows.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Canada’s Dollar Gains on Stocks, Crude Oil, Parity ‘Imminent’

The Canadian dollar advanced to within one cent of parity with its U.S. counterpart as signs of global economic recovery boosted stocks, commodities and currencies tied to growth.

The loonie, as Canada’s currency is nicknamed, touched C$1.0068 yesterday, its strongest level in almost two weeks. Canada’s dollar strengthened against 11 of its 16 major counterparts over the previous four days as a report on March 31 showed the nation’s economy grew in January at the fastest pace in three years.

“Commodity prices reflect stronger global growth and dulls demand for the U.S. dollar,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group Inc. in Greenwich, Connecticut. “Parity is imminent. It’s very, very difficult to argue against the global economic rebound.”

The loonie gained 1.7 percent to C$1.0095 versus the greenback this week from C$1.0266 on March 26, its biggest gain since the five days ended March 5. One Canadian dollar buys 99.15 U.S. cents. Canadian markets are closed today for the Good Friday holiday.

The Standard & Poor’s 500 Index rose for a fifth straight week, closing yesterday at its highest level since September 2008. Crude oil for May delivery rose 6.5 percent on the New York Mercantile Exchange. Crude oil is Canada’s biggest export.

The Canadian dollar tends to track movements in stocks and commodities. The loonie’s 120-day correlation with crude is 0.61 and 0.67 with the S&P 500. A reading of 1 would indicate they move in lockstep.

Manufacturing Data

Crude oil yesterday gained as much as 1.7 percent to a 17- month high of $85.22 a barrel after economic data from the world’s three largest economies reinforced confidence in the global economic rebound. U.S. manufacturing expanded last month at the fastest pace since July 2004, China’s manufacturing grew for a 13th month and a Bank of Japan survey showed confidence among the nation’s largest manufacturers rose for a fourth straight quarter.

“The tone of data releases were all better-than- expected,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Equities and commodities are posting gains. Unsurprisingly, the Canadian dollar as a risk-correlated currency is doing well.”

The Canadian dollar reached C$1.0062 on March 19, the strongest level since July 23, 2008, on speculation the nation’s accelerating economic recovery will spur the Bank of Canada to raise interest rates before the U.S. Federal Reserve.

Gross domestic product increased 0.6 percent in January, the fifth straight gain and the biggest since December 2006, Statistics Canada said this week. Economists surveyed by Bloomberg News had predicted the economy would expand 0.5 percent in the first month of 2010, according to the median of 20 estimates.

Positive Data

“There’s just so much positive economic data coming out of Canada that there hasn’t been anything to shake that sentiment,” said Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia, Canada’s third-largest bank.

Bank of Canada Governor Mark Carney signaled on March 24 the central bank may raise interest rates as soon as June as inflation and growth outpace forecasts.

“I don’t see any reason why they couldn’t pull the trigger ahead of us,” said Daniel Janis, a money manager in Boston at MFC Global Investment Management, referring to the Bank of Canada and the U.S. Fed in an interview this week. “Within the next six months, there’s going to be an inflection point on rates.”

Government bonds were little changed on the week. The yield on the 10-year security traded at 3.56 percent. The 3.75 percent security maturing in June 2019 rose one cent to C$101.51.

Treasury 10-Year Yields at Highest Since June After Jobs Report

Treasury 10-year note yields rose to the highest level since June after a government report showed the U.S. added the most jobs in three years last month, bolstering expectations the economic recovery is sustainable.

Government securities fell for a second consecutive week ahead of the Treasury’s scheduled offering of $82 billion of notes and bonds next week, including a record-tying $40 billion sale of three-year securities.

“The data supports the idea of a sustainable recovery going forward and yields should continue to head higher,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers required to bid at Treasury auctions. “We should break four percent on the 10-year soon.”

The 10-year note yield rose 7 basis points, or 0.07 percentage point, to 3.94 percent at 12:04 p.m. in New York, according to BGCantor Market Data. The yield increased 9 basis points on the week and is at the highest level since it reached 4 percent on June 11. The price of the 3.625 percent security due in February 2020 dropped 17/32, or $5.31 per $1,000 face amount, to 97 13/32.

Two-year note yields rose 4 basis points to 1.1 percent. Thirty-year bond yields increased to as high as 4.81 percent, also the highest since June.

U.S. employers added 162,000 jobs in March after a reduction of 14,000 positions in the previous month, the Labor Department reported today in Washington. The median forecast of 83 economists in a Bloomberg News survey was for an increase of 184,000. The unemployment rate was unchanged at 9.7 percent.

‘Accumulation of Information’

Futures on the CME Group Inc. exchange show a 60 percent chance that the Federal Reserve will increase the target rate for overnight lending between banks by at least a quarter- percentage point by November, compared with 45 percent odds a month ago.

“There will be an accumulation of information over time coupled with supply which could challenge the market and cause rates to probe higher levels,” said Chris Ahrens, head interest-rate strategist at UBS AG in Greenwich, Connecticut, a primary dealer. Treasuries also sold off due to “set up for next week’s supply,” he said.

Trading of Treasuries stopped at 12 p.m. in the U.S. for the observance of the Good Friday holiday on the recommendation of the Securities Industry and Financial Markets Association.

Inflation Expectations

Fed Bank of New York President William Dudley said yesterday the U.S. economic recovery may be “quite muted” and job growth is too slow, justifying low borrowing costs for a long period.

Inflation will probably stay very low as slack diminishes slowly in an economy that’s “qualitatively different from previous post-World War II business cycles,” Dudley said in a speech in Lexington, Virginia.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices, was 2.27 percentage points, compared with 2.41 percentage points at the beginning of the year.

Treasuries fell last week as lower-than-average demand at the government’s $118 billion in note auctions raised concern that investor interest is waning.

Next week’s $82 billion note and bond sales will include a record-tying $40 billion in three-year notes, $8 billion in 10- year Treasury Inflation Protected Securities, $21 billion in 10- year notes and $13 billion in 30-year bonds, the Treasury announced yesterday. The auctions will take place over four days starting with the TIPS sale on April 5.

“Bonds are cheapening up going into next week’s Treasury supply,” said George Goncalves, head of interest-rate strategy in New York at primary dealer Nomura Holdings Inc. “ All eyes and ears will be on the auction, especially after the last auction weakness. We’ve gotten to cheaper levels that should be attractive.”

European Stocks Climb to 18-Month High; U.S. Index Futures Rise

European shares surged to an 18- month high and Asian stocks gained as manufacturing expanded in Europe, China and India. U.S. index futures rose before reports on jobless claims and manufacturing.

BHP Billiton Ltd., the world’s largest mining company, rallied 2.1 percent in London as metals prices climbed. Bayerische Motoren Werke AG increased 2.9 percent after the carmaker was upgraded at Credit Suisse Group AG. Clariant AG climbed 5.4 percent after Exane BNP Paribas recommended buying the shares.

The Stoxx Europe 600 Index rose 1.1 percent to 266.36 at 10:33 a.m. in London, the highest intraday level since Sept. 26, 2008. The measure climbed 3.8 percent in the first three months of 2010, a fourth straight quarter of gains, as the European Union agreed a contingency rescue package to help Greece cut Europe’s biggest budget deficit and the Federal reserve pledged to keep interest rates low for an extended period.

“The strength of the economic recovery was underestimated and the positive dynamic is still under way,” said Rudolf Buxtorf, who helps manage about $500 million at RBS Coutts Bank in Zurich. “It’s too early to be euphoric but the positives have moved to the foreground. There are few alternatives to equities.”

Fifth Weekly Gain

The Stoxx 600 is heading for a fifth straight weekly advance, the longest winning streak in almost a year. The gauge has surged 69 percent from a 12-year low in March 2009 amid signs the economy is recovering the deepest recession since World War II.

Europe’s manufacturing industry expanded at a faster pace than initially estimated in March, adding to signs that a euro- area recovery is gaining strength. A manufacturing index for the 16 nations that use the euro increased to 56.6 from 54.2 in February, London-based Markit Economics said. That’s above an initial estimate of 56.3 published on March 24 and the fastest pace since November 2006.

An index of U.K. manufacturing rose to 57.2 in March from 56.5 in February, the Chartered Institute of Purchasing and Supply and Markit said. That was the highest since October 1994.

The MSCI Asia Pacific Index gained 1.1 percent today. China’s manufacturing Purchasing Managers’ Index rose to a seasonally adjusted 55.1 last month from 52 in February, according to Li & Fung Group. India’s manufacturing grew for a 12th straight month in March, according to HSBC Holdings Plc and Markit Economics.

Japanese Tankan

The Tankan index of sentiment among Japan’s largest manufacturers rose to minus 14 in March from minus 25 in December, the least pessimistic since 2008, according to the Bank of Japan.

Futures on the Standard & Poor’s 500 Index expiring in June advanced 0.5 percent.

A report at 10 a.m. New York time may show U.S. manufacturing grew at a faster pace in March, keeping factories at the forefront of the recovery. The Institute for Supply Management’s factory index rose to 57 from 56.5, according to the median estimate in a Bloomberg News survey of 77 economists. Readings greater than 50 signal expansion. Another report at the same time may show construction dropped.

Data from the Labor Department, due at 8:30 a.m. New York time, may show initial jobless claims fell by 2,000 last week to a seven-week low of 440,000. A separate report tomorrow is forecast to show U.S. payrolls rose by 190,000 in March, the biggest gain in three years, according to the median estimate of 62 economists surveyed by Bloomberg News.

Mining Companies

BHP Billiton rose 2.1 percent to 2,308 pence as copper climbed in London, leading a measure of mining companies to the biggest gain among 19 industry groups in the Stoxx 600. Rio Tinto Group, the world’s third-largest mining company, advanced 2.8 percent to 4,015 pence. Xstrata Plc, the biggest producer of coal for power stations, climbed 2.8 percent to 1,283.5 pence.

BMW rallied 2.9 percent to 35.17 euros. The world’s biggest maker of luxury cars was raised to “outperform” from “underperform” at Credit Suisse, which cited a “positive” pricing strategy.

Clariant advanced 5.4 percent to 14.14 Swiss francs. Exane reiterated its “outperform” rating on the shares before the world’s biggest maker of printing-ink chemicals reports better- than-estimated first-quarter profit this month.

Petroplus Holdings AG, Europe’s biggest independent refiner by capacity, surged 4.9 percent to 20.55 francs amid speculation oil-refining profits will recover further.

“We see average first quarter 2010 European margins back up to levels at least comparable with the second and third quarter 2009,” London-based broker Collins Stewart said in a note.

Richemont Rises

Cie. Financiere Richemont SA advanced 1.9 percent to 41.59 francs. The world’s largest jewelry maker agreed to buy the remainder of Net-a-Porter LLC, valuing the online fashion retailer at 350 million pounds ($533 million).

Mergers and acquisitions gained momentum in the first quarter with more than 2,034 cross-border transactions and 10 hostile takeovers signaling a recovery from the worst deal market in six years, according to data compiled by Bloomberg.

Orion Oyj sank 12 percent to 14.47 euros for the biggest drop in the Stoxx 600. Stalevo, a drug for Parkinson’s Disease from the Finnish maker of treatments for nervous-system disorders and Novartis AG, may be linked to an increase risk of prostate cancer, the U.S. Food and Drug Administration said.

Michelin & Cie. declined 1.8 percent to 53.59 euros. The world’s second-biggest tiremaker was downgraded to “hold” from “buy” at Deutsche Bank AG.

Asian Stocks Gain as China, South Korea Data Fuel Growth Hopes

Asian stocks rose, lifting the MSCI Asia Pacific Index for the fourth time in five days, as growth in Chinese manufacturing and surging South Korean exports bolstered confidence in the global economic recovery.

Datong Coal Industry Co. increased 3.1 percent in Shanghai as an index of the country’s manufacturing industry rose in March. Samsung Electronics Co., which generates more than 80 percent of its revenue outside South Korea, gained 3.3 percent after a government exports report beat economist estimates. Dai- ichi Life Insurance Co. surged 14 percent on its first day of trading. Lihir Gold Ltd. soared 33 percent in Sydney after rejecting a bid from Australia’s largest gold producer.

The MSCI Asia Pacific Index increased 1 percent to 126.38 as of 5:26 p.m. in Tokyo. The gauge has climbed 11 percent from a more-than-two-month low on Feb. 8 as improving U.S. jobs data, a Federal Reserve pledge to keep borrowing costs low and a Japanese bank-lending program eased concern that budget deficits in Europe will derail the revival in the global economy.

“The data will remain supportive even for the second quarter of this calendar year,” said Prasad Patkar, who helps oversee about $1.8 billion at Platypus Asset Management in Sydney. “The more skeptical view or concerns are in the second half of this year where the underlying economic activity will be a bit more exposed, rather than the stimulus-induced activity which the skeptics believe is what we’re seeing today.”

The Nikkei 225 Stock Average rose 1.4 percent in Japan, where a government report showed confidence among the country’s largest manufacturers advanced for a fourth-straight quarter.

Regional Indexes

China’s Shanghai Composite Index climbed 1.2 percent. Hong Kong’s Hang Seng Index gained 1.4 percent, with Cheung Kong (Holdings) Ltd. pacing gains among property developers on rising home sales.

South Korea’s Kospi Index rose 1.6 percent to the highest level since Jan. 21. India’s Sensitive Index gained 0.7 percent after a report from HSBC Holdings Plc and Markit Economics showed manufacturing grew for a 12th straight month in March.

Futures on the Standard & Poor’s 500 Index increased 0.5 percent. The gauge decreased 0.3 percent yesterday as private reports showed employers unexpectedly cut jobs this month and business activity grew less than forecast.

In Shanghai, Datong Coal, China’s third-largest coal company by capacity, rose 3.1 percent to 37.98 yuan. Baoshan Iron & Steel Co., the nation’s biggest steelmaker, added 1.5 percent to 8 yuan.

Higher Offer

China’s Purchasing Managers’ Index rose to a seasonally adjusted 55.1 from 52 in February, according to Li & Fung Group, a Hong Kong-based company that releases data for the Federation of Logistics and Purchasing. The figure was in line with the median estimate in a Bloomberg News survey of 13 economists. Readings above 50 indicate expansion.

Henan Yinge Industrial Investment Holding Co. jumped 3.7 percent to 10.16 yuan, pacing gains among paper manufacturers on speculation a stronger economy will push the government to allow currency gains, benefitting raw-material importers.

“The economy is in a good shape and growth is still gaining momentum,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “We are definitely in a growth cycle.”

The MSCI Asia Pacific Index climbed 3.9 percent last quarter, compared with 2.7 percent for the MSCI World Index, as economic data improved. The Asian gauge’s increase was its fourth-straight quarterly advance, lifting the average price of companies to 1.6 times corporate net worth, the highest level since September 2008.

South Korean Exports

Japan’s Tankan index of business sentiment rose to minus 14 in March from minus 25 in December, the fourth-straight gain, the Bank of Japan said today in Tokyo. South Korea’s government said today that overseas shipments advanced 35.1 percent in March from a year earlier, more than the 31.7 percent economists in a Bloomberg News survey estimated.

In Seoul, Samsung Electronics, Asia’s biggest maker of chips, flat screens and mobile phones, climbed 3.3 percent to 845,000 won, the leading mover on the MSCI Asia Pacific Index. Hyundai Motor Co., South Korea’s largest automaker, rose 4.8 percent to 121,000 won after reporting a 36 percent increase in monthly sales.

Commodity-related shares gained after oil and metals prices climbed yesterday. Crude-oil futures surged 1.7 percent to $83.76 a barrel yesterday in New York. The London Metals Index, a measure of six metals including copper and zinc, gained for the fifth day yesterday.

Commodity Prices

Mitsubishi Corp., which gets about 40 percent of sales from commodities, increased 1.5 percent to 2,487 yen. BHP Billiton Ltd., the world’s largest mining company, rose 0.8 percent to A$43.95. Rio Tinto Group, the world’s third-largest mining company, advanced 1.5 percent to A$79.60.

“A gain in commodity prices is showing strong business confidence,” said Mitsushige Akino, who oversees the equivalent of $450 million in Tokyo at Ichiyoshi Investment Management Co.

Lihir, the second-largest gold mining company on the Australian stock exchange, surged 33 percent to A$4.04. The company said a A$9.2 billion ($8.4 billion) cash and stock takeover from Newcrest Mining Ltd. was inadequate. Newcrest gained 2.9 percent to A$33.78.

CSR Ltd., Australia’s second-largest building products maker, jumped 6 percent to A$1.755. Bright Food Group Co., Shanghai’s biggest food company, raised its offer for CSR’s sugar unit to A$1.75 billion after the Australian company’s plan to spin off the division was blocked on asbestos concerns.

Dai-ichi Life

In Tokyo, Dai-ichi Life, Japan’s No. 2 life insurer, rose 14 percent to 160,000 yen from its initial offering price of 140,000 yen. Trading was halted as soon as the initial price was set.

Dai-ichi’s $11 billion IPO is the world’s largest since San Francisco-based Visa Inc. sold $19.7 billion of shares in March 2008. The stock was the most traded by volume on the Tokyo Stock Exchange’s first section, according to data compiled by Bloomberg.

“The fact that it opened at 160,000 means that investors are quite bullish,” said Curtis Freeze, chairman of Honolulu- based Prospect Asset Management Inc., which has $1 billion of assets. “The market’s reaction is positive, thanks to this pricing because that means there’s a lot of pent up demand for Japanese stocks.”

Shipping stocks advanced after the Baltic Dry Index rose for the first time since March 15, snapping its worst losing streak of the year, on demand to ship Australian iron ore to China. The index gained 0.5 percent yesterday, according to the Baltic Exchange.

Kawasaki Kisen Kaisha Ltd., Japan’s third-biggest shipping line, climbed 2.4 percent to 382 yen. STX Pan Ocean Co., South Korea’s biggest bulk carrier, rose 4.1 percent to 13,950 won. Korea Line Corp., the second-biggest, gained 2.5 percent to 64,600 won.

In Hong Kong, Cheung Kong advanced 2.5 percent to HK$102.50 after Centaline Property Agency Ltd. said existing home sales in the city rose 59 percent last month from February. New World Development, controlled by billionaire Cheng Yu-tung, gained 1.2 percent to HK$15.28.

Yen Tumbles as Global Recovery Signs Reduce Demand for Refuge

The yen touched an eight-week low versus the euro as signs the global economic recovery is gathering steam damped demand for Japan’s currency as a refuge.

The Japanese currency headed for its biggest monthly drop in a year versus the euro before a report tomorrow that may indicate confidence among Japan’s large manufacturers increased, boosting appetite for investments in countries with higher long- term interest rates. The franc climbed to a record against the euro as Swiss leading economic indicators rose in March to the highest level since November 2007.

“There’s a tremendous amount of pressure to push the yen lower in the next few days,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The market is expecting Japanese institutional investors to be chasing steepness in yield curves globally in relatively safe places.”

The yen depreciated 1.6 percent to 126.40 per euro at 2:01 p.m. in New York, from 124.44 yesterday, after touching 126.56, the weakest level since Feb. 3. It dropped 0.7 percent to 93.39 per dollar, from 92.76, after reaching 93.63, the weakest since Jan. 8. The euro climbed 0.9 percent to $1.3533, from $1.3414.

U.S. 10-year note yields have climbed 63 basis points, or 0.63 percentage point, to 3.82 percent since the end of November. Yields on comparable Japanese securities rose 14 basis points to 1.395 percent.

The Swiss franc gained as much as 0.7 percent to 1.4209 per euro, the strongest since the 16-nation currency’s 1999 debut, before trading at 1.4231, up 0.5 percent. It strengthened 4.2 percent for the quarter.

Monthly Loss

The Japanese currency was poised for a 4.2 percent loss versus the euro this month, the biggest since it tumbled 5.7 percent in March 2009. The yen headed for a 4.8 percent drop against the greenback, its biggest monthly decline this year.

The losses accelerated in New York trading as Japan’s fiscal year ended today, encouraging traders to place fresh bets on yen weakness on speculation Japanese companies had finished sending earnings back home. The yen fell the most this month against the euro among 16 major counterparts, exceeding the 0.3 percent drop of the Swedish krona, the second-worst performer, by more than 10 times.

“The fear was that heading into this fiscal year-end there would have be a significant potential for a pickup in repatriation of earnings back to Japan,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If those flows have materialized, it’s had very little supportive impact on the yen.”

Yen Outlook

Japan’s currency will probably fall 2.7 percent to 96 versus the dollar in the next six months as the Bank of Japan continues stimulating the economy, Hardman predicted. The Federal Reserve said on March 16 it would stop purchasing mortgage debt this month.

The yen briefly pared losses against the dollar and euro earlier today after a report showed companies in the U.S. unexpectedly cut payrolls in March. The 23,000-position decline shown by data from ADP Employer Services compared with a gain of 40,000 forecast in a Bloomberg News survey.

Today’s advance by the euro reduced its loss against the dollar in the first quarter to 5.5 percent. The drop, on concern Greece’s debt crisis will derail the region’s economic recovery, would still be the worst performance since an 11 percent decrease in the three months ended September 2008.

U.S. Rate Bets

Futures on the CME Group Inc. exchange showed a 56 percent chance the Fed will raise its target rate for overnight lending between banks by at least a quarter-percentage point by its November meeting, compared with 48 percent odds a month ago. The central bank has kept the target interest rate in a range of zero to 0.25 percent since December 2008.

The U.S. Labor Department’s nonfarm jobs report on April 2 is forecast to show employers added 184,000 positions, the most in three years, a Bloomberg survey of 81 economists shows.

Australia’s dollar fell for the first time in three days, dropping as much as 0.7 percent to 91.31 U.S. cents. The Bureau of Statistics said the nation’s retail sales tumbled 1.4 percent in February. Economists in a Bloomberg News survey forecast a 0.3 percent increase.

“That was a very awful set of retail sales numbers with broad-based losses,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong.

The Aussie has climbed 2.3 percent against the greenback this quarter after Reserve Bank of Australia Governor Glenn Stevens raised the benchmark cash target in March to 4 percent.

The U.S. dollar’s share of global currency reserves rose to 62.1 percent in the fourth quarter of 2009, and the euro’s share dropped to 27.4 percent, the International Monetary Fund said today in a quarterly report.

The yen’s share dropped to 3 percent from 3.2 percent and the British pound held at 4.3 percent in the period ended Dec. 31, the Washington-based fund said.

Mexico Peso, Bonds Gain as Debt Eligible for Citigroup Index

Mexico’s peso advanced to a 17- month-high and local bonds gained as Citigroup Inc. said the country’s securities are eligible to be included in its World Government Bond Index, helping luring foreign investors.

The peso jumped as much as 0.6 percent today, extending a 6.1 percent rally that has made it the best performer among the 16 most-traded currencies in the world this year. The yield on the country’s benchmark peso bonds due in 2024 fell five basis points to a one-month low of 7.92 percent on speculation Citigroup’s move will prompt investors who use the index as a benchmark to buy Mexican securities.

“This adds to the positive sentiment to the peso,” said Flavia Cattan-Naslausky, an analyst with RBS Securities Inc. in Stamford, Connecticut.

The currency was up 0.2 percent today to 12.3379 per U.S. dollar at 1:13 p.m. New York time, after earlier reaching 12.2921, the strongest level since October 2008.

The peso’s surge this year, the most among the 16 major currencies and the second-most among the 26 most-traded emerging market currencies, has been fueled by rising demand for its exports as the U.S. economy, Mexico’s biggest trade partner, recovers from a recession.

The yield on Mexico’s 10 percent peso bonds due in 2024 has declined 35 basis points, or 0.35 percentage point, from 8.27 percent on Dec. 31, according to Banco Santander SA. The price of the securities rose 0.47 centavo to 117.97 centavos per peso today, extending their advance this year to 3.19 centavos.

Put Options

Citigroup said that Mexican debt will join its World Government Bond Index after the county meets the criteria for three straight months, becoming the first Latin American country in the index, Citigroup said in an e-mailed statement. The debt may enter by October, the New York-based bank said in a statement.

Mexico “satisfies all three World Government Bond Index requirements -- size, credit and barriers to entry,” Citigroup said.

Mexico’s central bank is scheduled today to auction $600- million-dollar worth of put options, which allow it to sell the peso for the U.S. currency. Mexico’s central bank started to auction the options in February to accumulate foreign reserves. All of the options the bank sold last month were exercised by investors as the peso strengthened.

Dollar Losing Carry-Trade ‘Allure,’ Morgan Stanley’s Leven Says

The dollar is losing its popularity as a funding currency in the carry trade, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates, according to Ronald Leven, a senior currency strategist at Morgan Stanley.

While carry-trade demand is increasing as investors seek riskier assets, rising Treasury yields and speculation the Federal Reserve will rate interest rates sooner rather than later will damp the greenback’s use, New York-based Leven said in an interview yesterday. Low U.S. borrowing costs had encouraged investors to use the dollar instead of the yen.

“It seems anecdotally there’s some shifting away from the dollar,” Leven said. “Now that we’re starting to see the curve in the U.S. steepen and the market is thinking in terms of Fed tightening, the dollar seems to be losing its allure as a funding currency.”

Futures on the CME Group Inc. exchange showed a 44 percent chance Fed policy makers will increase the overnight target rate by at least a quarter-percentage point by the September meeting, compared with 32 percent odds a month ago. The yield curve, which plots the rate of Treasuries according to their maturity, has steepened as the gap between 2- and 10-year yields widened beyond levels last seen during the recovery after the 2001 recession.

In the carry trade, investors put the borrowed money into assets in countries with higher interest rates, such as Australia, where the benchmark is 4 percent, and South Africa, where it is 6.5 percent. Rates are 0.1 percent in Japan and zero to 0.25 percent in the U.S. The risk is that market moves can erase profits.

“The Aussie’s really by measures I think the best carry trade, even across emerging markets -- not the highest on an absolute basis, but by history and volatility,” Leven said.

Rising equity prices should renew interest in carry trade, which is still thin by historical standards, he said.