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Broadgate: Market News 14/3

14 March 2012

The dollar strengthened against most of its major counterparts after Federal Reserve policy makers raised their assessment of the U.S. economy and refrained from additional monetary easing.

The yen slid to an 11-month low versus the greenback as the yield spread between two-year debt in the U.S. debt and Japan widened to the most since July, making dollar-based assets more attractive. The yen also dropped as Asian stocks extended a global rally, damping demand for the lower-yielding currency.

The yuan weakened after Chinese Premier Wen Jiabao said the exchange rate may be near equilibrium and is likely to see more and larger two-way fluctuations.

Demand for Gold has strengthened as Europe seeks to contain its debt crisis, China’s economic expansion slows, and governments from the U.S. to the U.K. keep interest rates at all-time lows to shore up growth.

Part of the metal’s rally has been fueled by expectations that central banks will take additional steps to spur economic growth. Francisco Blanch, the head of commodity research at Bank of America Merrill Lynch Global Research, said at the conference that gold would reach $2,000 this year as the Fed seeks to add an additional $800 billion of monetary stimulus.

German Chancellor Angela Merkel said that European efforts to resolve the debt crisis are making progress, even as “imbalances” in euro-area economies show that the task is far from complete.

Merkel praised Monti’s “bold” efforts since taking office on Nov. 16 to overhaul Italy’s economy, which include 20 billion euros in austerity measures and steps to deregulate services amid surging Italian bond yields that threatened to rip apart the currency region. Aided by European Central Bank liquidity measures, Italian 10-year borrowing costs have fallen to 4.89 percent from a euro-era record of 7.26 percent on Nov. 25.

Monti, a former European Union competition commissioner, said Italy has “arrested” the crisis though not yet overcome it. “Italy still has homework to do,” he said. Italy prefers to rely on its “own strengths” rather than seek any external aid during the worst moments of the crisis.

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