Yen climbed to 3-month high versus dollar

Forex outlook:

The yen surged to the strongest in almost three months against the dollar as Asian stocks extended a global slump, prompting investors to unwind riskier investments funded by borrowing in Japan. The currency also rose as a government report showed companies invested at a faster pace than expected, adding to the Bank of Japan's case for raising interest rates. Traders said Monday's sell-off of currencies versus the yen was triggered partly by the Chicago Mercantile Exchange's announcement on Friday that it was raising the minimum amount of money required to trade yen futures due to higher market volatility. Japan's currency has gained 4.3 percent against the dollar over the past five days, touched the highest of 115.40 since 8 Dec. Speaking to reporters in Tokyo on Monday, Japanese Finance Minister Koji Omi said foreign exchange rates should reflect economic fundamentals. He declined to comment on specific exchange rate levels.

Sterling fell as Asian stocks tumbled to the lowest in two months, leading investors to avoid riskier investments such as the so-called carry trade. The carry-trade involves borrowing where interest rates are relatively low, as in Switzerland and Japan, and using the funds to invest in higher-yielding assets elsewhere. The pound was at $1.9220, from $1.9435.The pound may come under further pressure on speculation the Bank of England will lag behind the European Central Bank in raising interest rates. BOE will lift rates once again this year, while the ECB will probably lift them twice more, according to a new survey of economists. Both banks meet to set rates this week.

Losses in the dollar may be limited by speculation U.S. Treasury Secretary Henry Paulson will today say recent declines in global equities are unwarranted and he favors a strong currency. Paulson, scheduled to meet Japan's Omi in Tokyo, yesterday said the U.S. economy is “healthy” and downplayed last week's stock slump. Investors will be awaiting today’s ISM non-manufacturing index to be released in the U.S, which is a leading indicator of overall economic performance.

Gold: Gold futures traded near a five-week low at $640 an ounce as some investors continued to sell the metal to cover losses in equities. Gold futures in Japan dropped the maximum allowed by the exchange for a second day as Asian stocks dropped for a fourth day. In New York, the metal tumbled 5.9 percent last week after a sell-off wiped more than $1.5 trillion from the value of global equities. Some analysts said gold prices had already adjusted quite significantly lower and there was the possibility we might see some speculative investment buying at these sort of levels. But gains could be limited, with investors holding long positions in gold and also if the yen continued to rise.

Crude Oil: Crude oil prices fell for a second day to below $61 on Monday after mounting losses in Asian stock markets fuelled growing concerns over economic growth, prompting investors to pull back from riskier assets. Investors are concerned that global economic growth will slow, cutting fuel consumption. Despite the retreat, oil prices remain near their highest in two months and well above their 20-month low of under $50 a barrel, with traders already growing anxious over summer gasoline supply and keeping a wary eye on Iran. Attention is also shifting toward next week's OPEC meeting in Vienna, with most ministers already lining up in favour of a rollover on current production levels. 

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