GLOBAL MARKETS-Currency war talk caps moves in euro, shares

Mon Feb 11, 2013 8:39am EST

* Euro edges hovers above two-week low at $1.3390

* European shares retreat from last week's highs

* Brent crude slides under $119 a barrel

* Most Asian financial centres shut for Lunar New Year

By Richard Hubbard

LONDON, Feb 11 (Reuters) - The euro hovered just above a two-week low against the dollar while world shares lost ground on Monday, as growing talk of currency wars unsettled investors.

U.S. stock index futures suggested Wall Street may add to its gains from Friday, but low volume and the absence of any major economic news could make trading volatile.

Activity was light across all major markets after the Lunar New Year holiday shut most Asian financial centres, with the focus on an upcoming meeting of euro area finance ministers.

French Finance Minister Pierre Moscovici said the issue of the euro's recent strength would be discussed at the meeting and he called on members of the 17-nation currency bloc to cooperate more closely on exchange rate policy.

The comments come after European Central Bank President Mario Draghi suggested last week that further strength could lead to an interest rate cut. French President Francois Hollande has also urged the euro zone to set an exchange rate target.

"The idea of being interventionist in currencies is not particularly new. But at the moment, because some of the bigger players are at the forefront, it feels like a much more pressing issue for markets," said Daragh Maher, FX strategist at HSBC.

The Group of Seven major industrial nations may be about to add its weight to the debate, with two G20 officials telling Reuters it was considering a statement this week reaffirming a commitment to "market-determined" exchange rates.

The euro edged up 0.2 percent to $1.3390, having touched a two-week low of $1.3325 earlier in Asian trade as it extended a sell-off that has knocked around 2.5 percent from its dollar value since the beginning of February.

The euro made bigger gains against the yen and the British pound, though traders said this was demand from investors keen to buy the single currency after its broad retreat last week.

Some analysts believe the euro's fall since the beginning of the month was also justified by factors such as weakness in the region's economy, uncertainty surrounding political scandals in Spain and Italy, signs of tensions between France and Germany, and worries about a Cyprus bailout.

The fear of competitive devaluations by major economies has been building since Japan's new Prime Minister Shinzo Abe began putting pressure on its central bank to take aggressive easing measures to revive the nation's economy.

Japan's move followed a renewed commitment by the U.S. Federal Reserve to aggressively ease monetary policy, which also weakens the dollar, to bolster the U.S economic recovery.

Talk of a currency war was further heightened on Monday when Asian Development Bank president Haruhiko Kuroda, a front runner to be the next Bank of Japan governor, voiced his support for a weaker yen. While on Friday Venezuela devalued its currency by 32 percent.

Analysts said the concerns were likely to come to a head later in the week as the G20 prepares to meet in Moscow.

"The prospect of an international currency war has become an increasingly common topic of discussion in the press recently. As policy makers gather for the G20 this week, we expect this chatter to increase," said Sara Yates, Global Currency Strategist at J.P. Morgan Private Bank.

TRADE SUPPORTS

Equity markets meanwhile were sliding lower in a broad-based retreat after sharp gains at the end of last week when better U.S. and China trade figures bolstered hopes of a stronger global economic recovery.

MSCI's world equity index was down around 0.15 percent, and the pan-European FTSEurofirst 300 index eased 0.2 percent to 1,160 points by the midsession. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were flat to up 0.5 percent.

Crude oil prices, which also got a boost last week from trade numbers that included data showing China's oil imports running at their third highest rate on record, joined in the steady selloff.

Brent crude, which had hit a nine-month high of just over $119 per barrel on the Chinese numbers, dropped 92 cents on Monday to $117.98 a barrel. U.S. crude futures fell 14 cents to $95.58.

Oil markets could get some support from stormy weather in the heavily populated U.S. Northeast, where a blizzard dumped up to 40 inches (1 metre) of snow with hurricane force winds, leaving hundreds of thousands of people without power.

The outlook for oil demand should be become clearer later in the week when Germany, France and Italy release their latest quarterly gross domestic production (GDP) figures, which are expected to point to a steady contraction in the region.

Gold edged lower, in line with the trend among other riskier assets, falling 0.3 percent to $1,662.61 an ounce, while platinum and palladium hovered below their strongest levels in 17 months. Trading was thin, thanks to the Lunar New Year break.

"Gold is going to be pretty rangebound in the days ahead, with Asia absent," Standard Chartered analyst Dan Smith said.

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A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

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