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19 January 2011

The Dollar Tumbles as Yields Decline

Written by dslmpartners
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Global equities are broadly higher, despite the mixed tone in European trading, as Asian equities outperform. Asian stocks rose, led by technology companies as Apple and IBM reported earnings that exceeded analysts' estimates, sending the MSCI Asia Pacific index up 1.0%. Japan’s Nikkei ended the session up 0.3%, led by a rise in energy. Likewise, China’s stocks rose on speculation a government report due tomorrow will show inflation moderated last month. In Europe, meanwhile, stocks slid, dragging the benchmark Stoxx Europe 600 down from its highest level since September 2008. In the US, the markets were lower with the Nasdaq leading the markets lower.

 

Eurozone spreads are mixed as well, with Greece (likely driven by speculation that Greece is in talks with Germany to restructure its debt) and Irish yields up, despite the fact that Portuguese borrowing costs declined in today's bill sale. Portugal sold €750m of bills with an average yield of 4.029%, down from 5.281% from last year’s auction. Likewise, the bid-to-cover improved to 3.1 from 2.5, with 10-year Spanish yields down 2bp. Greece, meanwhile, denied speculation that it is in discussions with Germany to restructure its debt, according to Greek Finance Ministry. 10-year bund and gilts yields are both up 1bp, while the 10-year US Treasury yield is flat. Poland, as expected, increased its benchmark rate by 25bp to 3.75% from 3.50%.

Japanese officials are concerned about the strength of the yen. In fact, the rhetoric appears to have been stepped up in recent days. The financial crisis in Europe is one of the factors that may account for yen strength on the so-called safe haven appeal, which always strikes us as a bit ironic as Japan's debt/GDP ratio is well above the peripheral European countries. A weak euro is also not in China's interest. The euro zone is China's largest export market and the euro plays some role in the basket used for its currency regime. China does not reveal the currency composition of its reserves, but it is widely thought that euro accounts for something on the magnitude of 25-30% of its $2.8 trillion reserves, making its exposure to the euro substantial.