GLOBAL MARKETS-Yen slides on BOJ report, shares gain on policy hopes

Mon Feb 25, 2013 8:47am EST

* Yen hits 33-month lows against dollar on BOJ report

* World shares up 0.5 pct on signs of easier monetary policies

* Euro, Italian assets rise ahead of election outcome

* HSBC's Chinese factory PMI falls in February

By Richard Hubbard

LONDON, Feb 25 (Reuters) - The yen hit a 33-month low against the dollar on Monday as the prospect of unprecedented monetary easing in Japan rose, while world shares gained on hopes other major central banks will maintain or expand stimulus measures.

Japan's currency's resumed its recent slide after reports that the government would nominate Haruhiko Kuroda, a vocal advocate of aggressive monetary expansion, to be the next governor at the Bank of Japan.

A source familiar with the process told Reuters that an academic critical of central bank efforts to fight deflation would also be named as one of two new deputy governors.

"Both those candidates are in favour of more aggressive BOJ easing, and that is weighing upon the yen," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi.

The yen hit a low of 94.77 against the dollar, a level not seen since May 2010, before it recovered to around 94 yen. The euro jumped to a high of 125.36 yen and then settled at around 124.37, well below a 34-month peak of 127.71 set early this month.

The yen had already fallen around 20 percent against the dollar over the past three months or so on expectations that Japan would take more aggressive measures to defeat its persistent deflation and boost its recession-hit economy.

MONETARY ACCOMMODATION

The developments in Tokyo follow signs the Bank of England is considering more easing and come after two top U.S. Federal Reserve officials on Friday defended the central bank's current ultra-loose policies.

Minutes from the Bank of England's policy meeting last week showed a surprise rise in support for more quantitative easing, which has prompted analysts to expect the restart of a bond-buying programme it last used in October.

The growing signals that monetary polices will remain loose or get easier helped the MSCI world equity index gain 0.5 percent to 355.40 points after three consecutive weekly losses as evidence of sluggish global growth mounted.

Investors are now looking ahead to testimony by Fed Chairman Ben Bernanke to Congress on Tuesday and Wednesday, in which he is expected to downplay the idea that the central bank could prematurely end its current massive monthly bond-buying programme.

Another test for equities will come with the looming debate over massive U.S. government budget cuts that will take effect on Friday if lawmakers fail to reach an agreement over spending and taxes.

U.S. stock index futures pointed to gains ahead of Bernanke's testimony, though there remain some concerns that the Fed could end its stimulus sooner than many expect.

Earlier the news of Kuroda's likely appointment to the BoJ lifted Tokyo stocks to a 53-month high, though gains in other Asian markets were limited by data showing slowing growth in China's giant factory sector.

HSBC's flash purchasing managers' index (PMI) of Chinese manufacturers slipped to a four-month low of 50.4 from January's final reading of 52.3, which had been the best performance since January 2011.

The flash PMI, however, did indicate a fourth consecutive month of expansion, even though it only just cleared the 50-mark separating expansion from contraction.

ITALY EYED

In Europe attention was on the outcome of the unpredictable Italian elections, which hold the key to whether the country's current reform programme will continue uninterrupted.

Opinion polls have suggested the pro-reform, centre-left Democratic Party could secure a narrow victory in the recession-hit nation, the euro zone's third-largest economy.

Italy's benchmark index rallied 1.8 percent, and the buoyant mood helped the FTSEurofirst 300 index of top European companies rise 0.5 percent, to 1,173.79 points.

Britain's FTSE 100 also rallied 0.7 percent, shrugging off the loss of the first of the country's triple-A credit ratings late on Friday, which initially knocked both sterling and UK government bond prices.

The ratings downgrade by Moody's sent Britain's pound to a 31-month low against the dollar of $1.5073 and a 16-month low against the euro of 87.80 pence.

"This (the downgrade) increases the likelihood we will see more QE from the Bank of England, although the weakness in sterling is actually a good thing for the economy," said Don Smith, an economist at ICAP.

British government June bond futures touched a low of 115.50 , some 56 ticks down from Friday's close as the market reacted to the ratings loss, but the prospect of future policy easing helped the market bounce back quickly.

"Now that the UK's triple-A rating has been lost, it probably makes sense for the Chancellor to ease the pace of fiscal consolidation in tandem with expansionary monetary policy that is likely under incoming Bank of England Governor Mark Carney," said Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment.

Signs of ongoing or expanded monetary easing by global central banks helped lift oil prices, though worries that the slide in China's manufacturing activity would dent demand from the world's top energy consumer capped gains.

Brent crude gained $1.66 a barrel to $115.76, having hit a low of $113.73 when the Chinese data emerged. U.S. oil rose 82 cents to $93.95 after an earlier low of $92.96, near Friday's more than one-month trough of $92.44.

Investors in the gold market preferred to ignore the Chinese data and snap up the precious metal after last week's drop to a seven-month low, though the market was cautious ahead of the outcome of the Italian elections. Spot gold rose 0.6 percent to $1,589.14 an ounce.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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