LONDON, Aug 20 - The dollar held close to the previous session's 3-1/2 month high against the euro on Wednesday as investors bet a U.S.-led global recovery would be of little benefit to the ailing euro zone economy. The greenback also clawed higher against the yen after falling one percent fall on Tuesday as the Japanese monetary authorities warned against an export-damaging yen rise. Data showed the French economy shrank by 0.3 percent in the second quarter, following a contraction in Italy, Germany and Netherlands in the same quarter.
"French data showed the euro zone economy suffered from a downturn in activity related to the war. There's been reorientation of flows out of the euro zone fixed income into riskier, higher investment and there is a nascent sign investors are gaining appetite for unhedged purchase of U.S. equities," said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services. "But inflows into the U.S. have been moderated by significant doubts over the sustainability of the recovery. There is a perception that U.S. demand needs to fall to a level comparable with the rest of the world to narrow its current account deficit." By 0740 GMT the dollar stood at $1.1117 having risen to a high of $1.1053 on Tuesday. Against the yen it had recovered to 118.30 after tumbling all the way to 118.23 from a 119.79 high in the previous session.
U.S. stocks ended higher on Tuesday, with the Nasdaq closing at its strongest level in 16 months and the Dow Jones industrial average at its highest in 14 months. Stock futures were down in Europe however following disappointing results from technology bellwether Hewlett-Packard after the U.S. market closed.
JAPAN - FASTEST GROWING?
Also pressuring the euro were fund flows out of the euro zone into Japanese stocks, which added another one percent on Wednesday to close at their highest level since July 2002 Pro-cyclical Japan is considered to be the main beneficiary of a U.S.-led recovery as the country relies on exports to the United States and Asia. "Japan is more exposed to a global economic cycle given its disproportional share of exports. So if you want to do a global reflation trade, sell euro and buy yen," Pearson said. At an annualised 2.3 percent, Japan's growth in the second quarter far outpaced the euro zone and came close to the United States which posted a 2.4 percent gain. Analysts say given two thirds of the second quarter growth in Japan came from domestic demand, and with much of the U.S. growth coming from defence-related spending, Japan could have been the fastest growing developed economy in that quarter. But it was business as usual for the Japanese monetary authorities, which have spent a record nine trillion yen ($76 billion) on currency intervention this year to prevent a rise in the yen from derailing the country's economic recovery.
Japan's top financial diplomat Zembei Mizoguchi said the yen's rise had been too rapid and warned the Finance Ministry would not stand idly by. "When stocks are so strong, the yen should firm. But the market knows the authorities have been intervening heavily this year and that there is no question they will continue to do so if necessary," said Michihisa Tanimoto, deputy general manager at Sumitomo Life Insurance in Tokyo.//