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Dollar dips to new low against euro
(China Daily)
Updated: 2008-07-16 08:07

'Foul' Conditions

"The conditions are foul and it is possible that the downwards spiral continues if a possible run on banks in the US intensifies," said Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt.

The worries have come on top of other fears for the future, including record high oil prices threatening inflation, slowing growth in the US and European economies, and rising geopolitical concerns revolving around the Middle East.

European credit spreads widened sharply, led by financials and tracking US credit spreads overnight.

"Tuesday the crisis was over and today the crisis is back," a trader in London said.

The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 15 basis points wider at 555 basis points.

Crude oil was up around 80 cents on the day at more than $146 a barrel.

Euro zone government bonds gained. Ten-year Bunds yielded 4.319 percent, up 6 basis points, while the two-year Schatz yield was up 4 basis points at 4.353 percent.

The Bank of Japan cut its economic growth forecast to the slowest pace in six years and warned of the fastest inflation in a decade on Tuesday as surging energy costs and weakening exports batter the world's second-largest economy.

No Change in Japan

Although facing a combination of slowing growth and rising inflation, the Japanese economy was not in 1970s-style stagflation, Governor Masaaki Shirakawa said after the central bank decided to leave interest rates on hold.

With the benchmark rate a lowly 0.5 percent, investors expect the next move to be a rate hike. But the BOJ is more worried about growth than inflation, and markets are pricing in just a 16 percent chance of a hike this year.

While it faces a tough balancing act the BOJ's task is less complicated than that of the European Central Bank or the US Federal Reserve, because soaring commodity prices are not feeding through into wages and other costs in Japan.

"The BOJ expects an upswing in inflation for now, which will hurt growth," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan.

"But it does not foresee full-fledged inflation accompanied by wage rises, on the assumption that commodity prices will not continue to rise sharply."

Commodity costs act like a tax on Japan's economy, dampening consumption as it recovers from a decade of deflation and slashing the contribution of net exports to gross domestic product at a time when demand is sputtering in European and US markets.

Agencies

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