New Developments Abroad

May 20, 2008

Remarks by IMF Deputy Managing Director Lipsky sent the dollar sharply lower. He warned of continuing financial market risks posed by the U.S. housing market and said some Asian currencies remain undervalued, implying the dollar’s adjustment has not run full course.

Overnight dollar losses amount to 1.3% against the Swissy, 1.0% against sterling, 1.1% against the euro, 0.9% versus the Aussie dollar which hit a 24-year high of $0.9617, 0.7% against the kiwi, 0.4% against the yen, and 0.3% against the Canadian dollar.

Asian and European equities fell. Nikkei -0.8%. Dax -0.9%. Indian Sensex -1.2%. Chinese CSI 300 off 5.2%. Hang Seng -2.2%. And South Korean Kospi -0.7%.

Sovereign debt issues rallied. 10-year JGB yield slumped 5 bps to 1.615%. Gilt and bund yields off by 6 bps and 3 bps.

Oil steady but extremely high at $127.12/bbl. Gold edged up another 0.1% to $907.10/oz.

A two-day, five hour 17 minute meeting ended with the Bank of Japan leaving its benchmark target rate at 0.5% and its economic assessment unchanged: the economy is slowing on higher energy and raw material costs and likely to growth at a slower pace for now but moderate growth will follow thereafter. Governor Shirakawa asserted that the slowdown is becoming more evident.

Japan’s tertiary index for service-sector activity recovered just 0.3% in March, half as much as expected, and was 0.2% below the March 2007 level. The leading, coincident, and lagging economic indicators for March were each revised downward.

The German ZEW expectations index slid further to -41.4 in May from -40.7 in April, but current conditions improved to 38.6 from 33.2. The ZEW is based on a survey of financial market analysts and had been expected to rise.

ZEW Institute officials recommended an unchanged ECB interest rate structure for now, but they indicated a growing likelihood that the central bank may raise its rates.

Minutes from the May policy meeting at the Reserve Bank of Australia revealed that policymakers gave considerable thought to raising rates but in the end decided to let the current restrictive stance have more time to work. The policy bias remains in the direction of further restraint in the future if domestic demand doesn’t continue to slow.

Italian industrial orders sank 0.8% in March and fell 3.7% from a year earlier.

Democrats hold primaries today in Oregon and Kentucky. U.S. producer price data arrive at 12:30 GMT. Weekly chain store sales figures also get released in the U.S. today.

German producer prices jumped 1.1% m/m in April, twice as much as forecast, which lifted its 12-month rate of climb from 4.2% to 5.2%, most since August 2006. The PPI so far in 2008 has advanced 7.6% saar and by 4.1% saar excluding energy.

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