European markets drop as dollar surge continues

[December 07, 2009]  LONDON (AP) -- European stock markets fell Monday as the dollar jumped to a five week high against the euro amid improved expectations about the pace of recovery in the world's largest economy.

The FTSE 100 index of leading British shares was down 41.84 points, or 0.8 percent, at 5,280.52 while Germany's DAX fell 43.94 points, or 0.8 percent, to 5,773.71. The CAC-40 in France was 27.60 points, or 0.7 percent, lower at 3,819.02.

The euro was down 0.4 percent at $1.4797, having earlier fallen to $1.4757, its lowest level since early November. Before Friday's news that U.S. employers shed a much lower than anticipated 11,000 jobs in November and the unemployment unexpectedly fell to 10 percent, the euro was trading near its 16-month high of $1.5144.

One of the main impacts from the dollar's rally has been to send commodity prices down, most notably gold, which has fallen sharply from near-record highs -- a stronger U.S. currency typically causes commodity markets, priced in dollars, to fall. An ounce of gold was down a further 2.2 percent at $1,143.60, way lower than last week's record high above $1,225.

As a result, commodity stocks were hit hard -- in London, Eurasian Natural PLC, Xstrata PLC and Fresnillo PLC were three of the biggest fallers on the FTSE 100.

"A firmer dollar points to a temporary correction in commodities and equities," said Neil Mackinnon, global strategist at VTB Capital.

Meanwhile, mounting optimism about the U.S. economic recovery was tempered by a growing perception that the U.S. Federal Reserve may start to withdraw some of its extraordinary policy measures sooner than anticipated -- U.S. Treasury yields increased sharply in the wake of the jobs data. And with the year-end looming, analysts said investors may be looking to wind down their trading positions and book some profits, especially as this time last year most faced hefty losses.

"Concerns surround the fact that with equities still looking inflated as we approach the year end, anything that sends jitters through the market could initiate a quick wave of selling and as volumes start to thin in the coming weeks, the consequences here could prove especially marked," said Ben Potter, research analyst at IG Markets.

There's a dearth of economic news Monday, leaving investors to look ahead to Friday's U.S. retail sales figures for November, which will give an early indication into how the Christmas trading period has begun.

The state of household spending in the U.S. is key for the global economic recovery -- U.S. consumer spending accounts for around 70 per cent of the nation's economy.

Earlier in Asia, Japanese stocks were buoyed by the weaker yen, which makes the country's exports into the United States cheaper. Investors were getting increasingly concerned over the last few weeks that the rise in the yen to 14-year dollar highs was threatening to hit the country's exports.

Japan's benchmark Nikkei 225 average rose for a sixth straight session, climbing 145.01 points, or 1.5 percent, to 10,167.60, the highest close since late October.

Since Japanese markets closed, the yen has recouped some ground against the dollar, which was trading down 0.3 percent at 90 yen. Nevertheless, the dollar is still way up on where it was just ten or so days ago, when it slid to 84.81 yen, its lowest level since mid-1995.

In Hong Kong, the Hang Seng index fell 173.19, or 0.8 percent, to 22,324.96 while in Australia the main index slipped 25.7 points, or 0.6 percent, to 4,676.50.

South Korea's Kospi gained 0.5 percent and Singapore's benchmark climbed 0.4 percent. China's Shanghai index rose 0.5 percent to 3,331.90 after the government pledged to maintain economic stimulus and easy credit policies at a top planning meeting.

Oil prices hovered slipped to near $75 a barrel after several OPEC ministers said they don't expect their group to change production levels at a meeting later this month.

Benchmark crude for January delivery was down 66 cents to $74.81 in electronic trading on the New York Mercantile Exchange. The contract lost 99 cents to settle at $75.47 on Friday.

[Associated Press; By PAN PYLAS]

Associated Press writer Malcolm Foster in Tokyo contributed to this report.

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