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While you were sleeping: Momentum shifts, again

Thursday 7th October 2010

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Equities on Wall Street declined, a day after sharp gains, as worse-than-expected employment data renewed concern about the US economic recovery.

An unexpected 39,000 drop in private payrolls as reported by ADP Employer Services hurt confidence in the outlook for the world’s biggest economy and bolstered speculation that the Federal Reserve would be pressed to purchase more fixed-income securities to aid growth.

US Treasuries advanced, pushing five-year yields to a record low.

All three key US share markets were down in early afternoon trading. The Nasdaq Composite Index fell 1.19%. The Dow Industrial Average was down 0.39% and the Standard & Poor’s 500 Index slipped 0.10%.

"Investors continue to dance to the tune of quantitative easing and its intended inflation of asset prices," hedge fund manager Doug Kass of Seabreeze Partners, told clients, according to Reuters.

The International Monetary Fund lowered its global forecast, saying the world economy would grow 4.2% in 2011, down from its forecast of 4.3% three months ago. The Washington-based IMF forecast growth of 4.8% this year, up from 4.6%.

The IMF cited high unemployment, public debt and fragile banking systems as risks to global prosperity.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.46% to 77.45. The yen reached a 15-year high against the greenback.

In a speech in Washington, US Treasury Secretary Timothy Geithner made clear his disapproval of attempts by several countries to devalue their currencies in recent weeks.

"This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," he said at the Brookings Institution, a Washington think tank.

Geithner says when countries act to devalue their currencies, it makes it increasingly harder to persuade China to allow the yuan to appreciate.

"Don't look for a near-term quick fix on this," he said.

"This is the central existential challenge of cooperation internationally and it will take a long period of time."

Meanwhile, China reiterated its opposition to a rapid appreciation of the yuan. Premier Wen Jiabao told an EU-China business forum in Brussels that China would keep its policy, announced in June, of gradually increasing the currency’s flexibility.

Wen rebuffed calls from EU leaders for a rapid and substantial appreciation.

"Do not work to pressurise us on the renminbi rate," the premier said, departing from a prepared speech to a business forum on the sidelines of a summit with EU leaders.

"Yes, we are going to proceed with the reforms."

Foreign exchange rates are expected to be a key topic of discussion at this weekend’s annual IMF and World Bank meetings in Washington, though no immediate resolutions are expected.

One continuing positive of the declining US currency is that gold was propelled to another record high.

Spot gold rose as high as US$1,349.80 an ounce earlier in the day, up from US$1,338.70 late in New York on Tuesday.

US gold futures also rose to a record, climbing to US$1,351 an ounce, before recently trading  US$8.10 higher at US$1,348.50 an ounce.

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