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RealClearMarkets’ Tamny: US Pursues Weak Dollar Policy at its Peril

“The Treasury and Federal Reserve are pursuing a weak dollar policy, as John Tamny, editor of RealClearMarkets.com sees it.

And the economy will continue to suffer if they don’t change course, he says.

“My view for quite some time has been that when we talk about economic problems in the U.S., we are really talking about symptoms of the weak dollar,” Tamny tells Yahoo.

“If the stated objective of your monetary policy is to devalue dollars, it is going to be true that investment is going to be less such that economic growth is less.”

Some economists say a weak currency is beneficial, because it boosts exports and curbs imports. But Tamny disagrees.

“Imports are beautiful. It is poor countries that don’t import,” he says. “If devaluation were the path to prosperity, then countries like Argentina and Zimbabwe and Turkey would be among the richest in the world.”

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Most-Accurate Forecasters On Euro Clash With Options Sign

“The world’s most-accurate foreign- exchange strategists say the worst is over for the euro this year, putting them at odds with traders who see more pain as the region’s economy shrinks and the sovereign debt crisis deepens.

Led by Wells Fargo & Co. and Westpac Banking Corp. — which correctly called the euro’s weakness last quarter — the five best firms as measured by Bloomberg expect Europe’s 17-nation common currency to end the year at about $1.26, up from $1.2289 as of 11:01 a.m.London time. That’s above the $1.24 median estimate in a survey of 55 strategists by Bloomberg News.”

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The Aussie Dollar Falls on Concerns ECB Rate Cut is Not Enough

“Australia’s dollar fell along with Asian stocks amid concern the European Central Bank’s cut ininterest rates yesterday won’t be enough to stem the region’s debt crisis, damping demand for riskier assets.

The so-called Aussie dollar trimmed its weekly gains versus the greenback and yen even afterChina yesterday cut its key interest rate for the second time in a month and the Bank of Englandexpanded asset purchases in efforts to bolster growth. Losses in New Zealand’s kiwi dollar were limited after the government said its deficit was narrower than forecast.

“The ECB didn’t announce extraordinary measures yesterday, such as possible bond purchases,” said Junya Tanase, chief currency strategist at JPMorgan Chase & Co. in Tokyo. “The market is jittery about the status quo in terms of the ECB’s handling of sovereign risks. The Aussie and kiwi are trading softer in such a risk-averse environment.”

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FLASH: The Euro Super-Spikes Off EU Summit News

Now +1.25%

ECB to be agent for rescue funds in operations-Van Rompuy

* ESM’s lack of preferred credit status to Spain cheered

* Agreement upends expectations for no progress at EU summit

* China PMI on Sunday, U.S. jobs next week will be in focus

By Antoni Slodkowski

TOKYO, June 29 (Reuters) – The euro surged 1.1 percent, poised for its biggest daily jump in eight months, after European leaders agreed on Friday to emergency action to lower borrowing costs of Italy and Spain and to create a single supervisory body for euro area banks.

A summit of the 17-nation currency zone agreed that its rescue funds could be used to stabilise bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms.

“If what he (European Council chairman Herman Van Rompuy) said was indeed agreed by EU leaders, that would clearly go beyond market expectations and should be enough to stop risk aversion in financial markets,” said Hiroki Shimazu, senior market economist at SMBC Nikko Securities.

The common currency soared more than 1.2 percent on a flurry of stop-loss buying to as high as $1.2628, pulling away from a low of 1.2407 marked on Thursday. It later settled around 1.2573.

The leaders also agreed that the bloc’s future permanent bailout fund, the European Stability Mechanism (ESM), would be able to lend directly to recapitalise banks without increasing a country’s budget deficit, and without preferential seniority status.

The preferred creditor status of the ESM worried markets, piling pressure on Spanish bonds, because investors were concerned that if Spain were to default, the ESM would get paid back first and there would not be enough money left to repay private bondholders.

“Because market expectations on the summit were so depressed, it was a bit like there was a drop of rain in the desert,” Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

“Van Rompuy suggested that the EU is considering direct bank recapitalisation of banks through the ESM. It seems like the summit is moving in a favourable direction for markets,” Sera said.

Chartists pointed out, however, that the euro failed to decisively move above the immediate resistance at 1.2617 – the 61.8 percent retracement of its slump over the past two weeks. A clear break above the resistance and then 1.2630 would pave the way for a return to last week’s high at 1.2748.

Countries that request bond support from the rescue fund would have to sign a memorandum of understanding setting out their existing policy commitments and agreeing on a timetable. But they would not face the intrusive oversight of a “troika” of international lenders to which Greece, Ireland and Portugal have been subjected, Italian Prime Minister Mario Monti said.

Spain and Italy had earlier withheld their agreement to a growth package at a European Union summit to demand emergency steps to bring down their spiralling borrowing costs, which threaten to force the third and fourth largest economies in the euro zone out of the capital markets.

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The Aussie and Kiwi Dollars Rallied on Hopes the U.S. Economy Will Not Falter

“The Australian and New Zealand dollars climbed for a third day as U.S. economic reports eased concern the world’s largest economy is faltering, boosting demand for higher-yielding assets.

The so-called Aussie headed for its biggest monthly gain versus its U.S. counterpart since January as traders added to bets the Reserve Bank of Australia will keep rates unchanged next week as long as Europe’s debt crisis doesn’t worsen. New Zealand’s currency, nicknamed the kiwi, was set for the second- biggest gain in June among the greenback’s 16 major peers as Asian stocks extended a global advance.”

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