October 25, 2010 / 3:01 PM / 9 years ago

GLOBAL MARKETS-Absence of firm G20 pact sends dollar lower

* G20 triggers heavy dollar selling, stock buying

* Federal Reserve quantitative easing prospects drive risk

* All three major U.S. indexes up about 1 percent (Rewrites; changes byline, dateline, previous LONDON)

By Jennifer Ablan and Jeremy Gaunt

NEW YORK/LONDON, Oct 25 (Reuters) - Investors on Monday continued a familiar pattern of heavily selling dollars and buying emerging-market shares, calculating that a Group of 20 meeting that produced lots of noise but no firm policy initiatives had left market trends unchanged.

MSCI’s emerging market stock benchmark .MSCIEF shot up more than 1 percent for a year-to-date gain of nearly 13 percent. The dollar lost 0.66 percent against a basket of currencies .DXY.

European shares gained and all three major U.S. indexes rose about 1 percent in early New York trading. G20 finance ministers pledged on Saturday to move toward market-determined exchange rates and commit to a variety of policies to reduce excessive external imbalances.

But no major policy initiatives emerged and the United States failed in an attempt to shrink China’s surplus. Consequently, investors extended the recent pattern of selling the dollar in expectation of further quantitative easing asset-buying from the Federal Reserve, which essentially entails printing more dollars and lowers their value.

“By demanding ‘market determined exchange rates’ (at the G20) the U.S is opening the floodgates for a further dollar depreciation due to the ultra-expansionary monetary policy in the U.S.,” Commerzbank analysts said in a note.

The dollar weakened broadly, losing 1 percent against the Japanese yen JPY= while the euro gained 0.25 percent to $1.3988 EUR=. Analysts at Goldman Sachs said the Fed is almost certain to announce renewed monetary easing at next week's policy meeting. The analysts said the Fed may announce $500 billion in asset purchases or a bit more over a period about six months, and the size could eventually reach $2 trillion.


The prospect of a weaker dollar and higher emerging market currencies, as well as economic growth differentials, have already triggered massive investment flows into emerging markets.

But the idea of huge dollar liquidity has also pumped up equities in general.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares was up 0.5 percent at 1,094.71 points. Mining stocks were leading the charge on the assumption that a weaker dollar drives commodity prices higher.

“Profitability and earnings are going to be up. This is a sector that will have earnings upgrades. Even if the dollar started to steady, there are supply constraints,” said Philip Isherwood, European equities strategist at Evolution Securities.

Japanese equities fell, with the Nikkei .N225 losing 0.27 percent as exporters were hurt by the rising yen.

JPMorgan Asset Management, meanwhile, warned its clients not to become too carried away with the prospect of quantitative easing.

“Strong asset price gains were seen as one of the primary objectives of QE, with the central bank reportedly keen to boost household wealth and to prompt risk appetite within the economy,” it said.

“As a result, strong gains ahead of the FOMC arguably reduce the need for QE and thus increase the chances of disappointment when the Fed finally announces the outcome of its deliberations.”

In that regard, benchmark indexes were up on Monday.

The Dow Jones industrial average .DJI was up 99.60 points, or 0.89 percent, at 11,232.16. The benchmark Standard & Poor's 500 Index .SPX was up 10.80 points, or 0.91 percent, at 1,193.88. The Nasdaq Composite Index .IXIC was up 24.47 points, or 0.99 percent, at 2,503.86.

U.S. Treasury debt prices also were higher.

The benchmark 10-year U.S. Treasury note US10YT=RR was up 16/32, with the yield at 2.50 percent. The 2-year U.S. Treasury note US2YT=RR was up 1/32, with the yield at 0.35 percent. The 30-year U.S. Treasury bond US30YT=RR was up 31/32, with the yield at 3.88 percent.

U.S. light sweet crude oil CLc1 rose $1.39, or 1.7 percent, to $83.08 per barrel, and spot gold prices XAU= rose $10.41, or 0.78 percent, to $1337.60. The Reuters/Jefferies CRB Index .CRB was up 3.33 points, or 1.12 percent, at 300.56.

Editing by Padraic Cassidy

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