LONDON, Sept 22 - A slide in the dollar after a weekend call from the Group of Seven for more flexible exchange rates pummelled U.S. Treasury bonds on Monday and sent shares tumbling in Europe and Asia. The dollar fell to its lowest against the yen in nearly three years and its weakest against the euro in eight weeks. The G7 called for more exchange rate flexibility to help iron out global economic imbalances and markets interpreted its statement as criticism of persistent intervention by Asian countries to weaken their currencies and boost domestic exports. U.S. Treasuries fell, while European and Japanese government bonds prices rose.
"The implication is that Asian banks will now dump Treasuries and so Bunds and Japanese debt will be popular," said Marc Ostwald, a bond broker at Monument Securities in London. "It's also bad news for the exporter-rich Nikkei index." Asian central banks have been buying dollars mainly via U.S. Treasuries to cap the strength of their currencies. Any possibility that this might not continue would be negative for Treasuries. However, the U.S. needs to attract about $1.5 billion a day from foreign investors to finance its budget deficit. Treasury yields, which move inversely to prices, rose sharply. The 10-year note yield was up 4.8 basis points at 4.21 percent. By contrast, the 10-year euro zone benchmark Bund yield was down 4.4 basis points at 4.11 percent. The interest rate sensitive two-year Schatz note was yielding 2.34 percnet, down seven basis points. "With the restrengthening of the euro against the dollar, speculation is coming back that if this is going to continue pressure on the European Central Bank to cut rates will re-emerge," said Peter Fertig, chief fixed income strategist at Dresdner Kleinwort Wasserstein in Frankfurt.
STOCKS SUFFERING
The weaker dollar hit European auto and tech stocks and investors locked in recent gains. Shares have risen sharply in recent weeks as evidence has grown of global economic recovery. The FTSE Eurotop 300 index <.FTEU3> of pan-European blue chips was down 1.92 percent while the narrower DJ Euro STOXX 50 index <.STOXX50E> was off 2.31 percent. Earlier, Japan's Nikkei <.N225> stock index fell more than four percent after the surge in the yen doused some optimism over Japan's export-led recovery. "The Bank of Japan probably won't have the free hand it had before to intervene in the currency markets and the yen's jump is obviously hitting exporters, especially autos and techs," said Zenshiro Mizuno, senior managing director at Marusan Securities. The Nikkei fell 4.24 percent and the broader TOPIX index <.TOPX> ended down 2.51 percent. Wall Street looked set to open lower. Stock index futures were down in early European trade. Fertig at DrKW said that while the weaker U.S. dollar should be positive for the U.S. economy "on the other hand this implies less foreign capital will flow into the U.S. markets." The yen retraced some of its gains against the dollar after Japan's top financial diplomat Zembei Mizoguchi and its newly-appointed finance minister Sadakazu Tanigaki said on Monday its stance of acting in the foreign exchange market as needed had not changed. The yen initially rose as far as 111.41 per dollar , its highest since December 2000 and up more than two percent from late Friday's level, in reaction to the G7 statement. The yen was last at 111.70 to the dollar. The euro was at $1.1470, off an eight-week high of $1.1495. Spot gold was at $386.20/386.70 an ounce after the G7 call and on expectations banks would maintain restraint in selling off gold in their vaults.//