Dollar Rises, Stocks Fall as Greek Downgrade Fans Safety Demand

Bloomberg | December 17, 2009 | 09:37 EST

The dollar rose to the highest level in three months against the euro while stocks and commodities fell as Greece’s debt downgrade fanned concern that spiraling national debts may hamper the global economic recovery. The U.S. currency advanced against all of the 16 most- traded peers at 9:32 a.m. in New York after the Federal Reserve indicated yesterday that it may begin to scale back emergency lending programs. The Standard & Poor’s 500 Index lost 0.7 percent as Citigroup Inc. sold stock at a discount; FedEx Corp.’s profit forecast trailed estimates and initial jobless claims unexpectedly increased. The MSCI World Index of 23 developed nations’ stocks slipped 1.3 percent. Oil and gold led declines in commodities.

Standard & Poor’s decision yesterday to reduce Greece’s credit rating for the second time this year raised concern among investors that the worst global recession since World War II is still weighing on some economies. At the same time, the Fed said after a two-day meeting that most of its lending programs will expire as scheduled Feb. 1 because of ‘improvements in the functioning of financial markets.’ “All eyes are on Greece, and to a lesser extent Spain and the U.K.,” said Luca Cazzulani, a fixed-income strategist at UniCredit SpA in Milan. “The situation requires a lot of prudence right now” from investors, he said.    

Retreat from Risk

Investors retreated from higher-yielding assets to the safety of dollars, Treasuries and the yen. The dollar climbed as much as 1.4 percent against the euro to its highest level since Sept. 8 and the yen rose against 14 of the 16 most-traded currencies, adding 0.9 percent compared with the European currency. Government bonds advanced, with the yield on the 10- year Treasury note falling seven basis points to 3.52 percent. Financial shares led declines in U.S. stocks as Goldman Sachs Group Inc. and Morgan Stanley fell after analyst Meredith Whitney reduced earnings estimates on concern clients are trading less. Investors also awaited the U.S. index of leading economic indicators, which probably rose for an eighth month in November, suggesting growth will extend through the first half, economists said before the data at 10 a.m. in New York.

Greek bonds tumbled, sending the 10-year note yield up 16 basis points to 5.67. Credit-default swaps linked to Greek debt rose 21 basis points to 260, according to CMA DataVision, the highest since March. Greek stocks helped lead the declines in Europe, with the Athens Stock Exchange General Index falling 1.1 percent. Governments around the world are selling unprecedented amounts of debt, straining budgets just as the economic recovery takes hold. Moody’s Investors Service said in a Dec. 8 report, the credit ratings of the U.S. and U.K. may “test the Aaa boundaries.”

Pound Slides

The pound dropped 1.3 percent to its lowest level in two months against the dollar after the Office for National Statistics in London said British retail sales unexpectedly fell in November for the first time since May. The MSCI Asia Pacific Index fell 0.9 percent. Westpac Banking Corp. dropped 1.1 percent in Sydney and China Overseas Land & Investment Ltd. lost 1.9 percent in Hong Kong. National Australia Bank Ltd. slid 4.7 percent after saying it will sell stock to fund the purchase of AXA Asia Pacific Holdings Ltd. Hong Kong may suffer “sharp corrections” in asset prices should fund flows reverse, according to the city’s central bank. A rally in the stock market was fueled by an influx of capital fanned by the outlook for China’s economy, the Hong Kong Monetary Authority said in a quarterly report yesterday.

Emerging Markets Drop

The MSCI Emerging Markets Index fell 1.6 percent, the steepest decline since November, exceeding the decline in the world index. Developing-nation bonds dropped, sending the extra yield investors demand to own the debt over U.S. Treasuries up 11 basis points to 3.05 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. Emerging-market currencies that traded against the dollar weakened, led by declines of 1.7 percent in the ruble and 1.5 percent in South Africa’s rand. Copper for delivery in three months declined 1.8 percent to $6,915 a metric ton on the London Metal Exchange, leading a retreat in industrial metals. Crude oil for January delivery fell 0.8 percent to $72.08 a barrel in New York. Gold for immediate delivery dropped 1.8 percent to $1,118 an ounce in London as the stronger dollar diminished the appeal of the metal.


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