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Tuesday, Feb 12, 2013 3:30 PM UTC

G7 pledge against currency war hurts dollar

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G7 pledge against currency war hurts dollarA visitor looks at an electric stock price display at the Tokyo Stock Exchange in Tokyo, Tuesday, Feb. 12, 2013. Tokyo's Nikkei 225 led Asian stocks higher Tuesday as the yen weakened after a possible candidate for Bank of Japan governor voiced support for easier monetary policy. (AP Photo/Itsuo Inouye)(Credit: AP)

LONDON (AP) — A pledge by the Group of Seven most powerful economies to avoid a global currency war pushed stocks higher on Tuesday while dragging the dollar lower against the Japanese yen and the euro.

The G-7 nations, which include the U.S., Japan and Germany, said their economic policies should be “oriented towards meeting domestic objectives and not towards setting specific exchange rates.”

That was meant to ease concerns that major economies were retooling their monetary policies to specifically weaken their national currencies to help domestic exporters.

Such worries began after Japan announced in December a new ultra-loose monetary policy that caused a sharp drop in the yen against other major currencies. With all major economies struggling to recover from the financial crisis, that raised the specter that global central banks might race to loosen monetary policies to weaken national currencies.

Last week, French President Francois Hollande even said that the 17 eurozone governments should manage their currency’s exchange rate.

A so-called “currency war” would damage the global economy, whose recovery from the financial crisis is still fragile, by hurting trade.

After the statement’s release, the euro was up 0.2 percent on the day at $1.3425.

Germany’s DAX stock index rose 0.1 percent to 7,638.23 while France’s CAC 40 gained 0.4 percent to 3,663.18. Britain’s FTSE 100 was up 0.6 percent at 6,315.57.

Wall Street gained on the open as well, with the Dow up 0.1 percent at 13,986.53 and the broader S&P 500 0.1 percent higher at 1,518.04.

Despite the positive market impact, analysts warned that the G-7 statement changed little in concrete terms, since any country could claim that its loose monetary policy was used to help the domestic economy, not set the interest rate. There is little to stop the Japanese central bank, for example, from continuing to pursue its ultra-loose monetary policies.

“One might well argue that this is a case of not being able to see the wood for the trees,” said Marc Ostwald, strategist at Monument Securities in London.

That skepticism was apparent in the performance of the yen, which initially remained stable against the dollar as investors interpreted the G-7 statement as an endorsement of the country’s policies.

The yen strengthened, later on, however, on speculation that the G-7 was putting pressure on Japan to not let its currency weaken too rapidly. By midafternoon in Europe, the dollar was down 0.7 percent at 93.50 yen.

The Japanese currency has dropped almost 8 percent against the dollar this year as Japan’s Prime Minister Shinzo Abe called for the central bank to ease monetary policy more aggressively.

Central bank governor Masaaki Shirakawa, who has appeared at odds with Abe’s views on monetary policy, is resigning next month, giving the government an opportunity to find a successor more sympathetic to its aims.

Asian Development Bank President Haruhiko Kuroda voiced support Monday for Abe’s economic policies including the introduction of a 2 percent inflation target but kept mum about speculation he may become the next BOJ governor. In an interview with media organizations, Kuroda said the BOJ’s introduction of the target, proposed by Abe, was “epoch-making” and should be achieved “in about two years.”

Tokyo’s Nikkei 225, which closed before the G-7 statement was released, rallied 1.9 percent on Tuesday.

The Bank of Japan holds a two-day policy meeting starting Wednesday but analysts said no new initiatives were expected in light of the impending leadership change.

Markets, meanwhile, were unfazed by a nuclear test conducted by North Korea on Tuesday. Pyongyang said it successfully detonated a miniaturized nuclear device at a northeastern test site.

South Korea’s Kospi fell 0.3 percent to 1,945.79 while benchmarks in Indonesia, Thailand and India rose. In Australia, the benchmark S&P/ASX 200 finished nearly unchanged at 4,959.

Markets in mainland China, Hong Kong, Singapore, Malaysia and Taiwan were closed for Lunar New Year holidays.

Benchmark oil for March delivery was up 38 cents to $97.41 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.31 on Monday.

___

Pamela Sampson in Bangkok contributed to this report.

More By Carlo Piovano.

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