Dollar Surges After China's Surprise Rates Cut

By Josie Cox
        The U.S. dollar surged in Europe Monday close to an 11-year high against a number of major currencies, boosted by Beijing's decision over the weekend to cut interest rates for the second time in less than four months, in a further sign of global monetary policy divergence.

        The dollar added around a quarter of a percentage point against both the euro and sterling in early trade, while the dollar index--which measures the greenback's strength against a bucket of major currencies--climbed close to its September 2003 high of 95.527.

        The surprise move by China's central bank lowers both China's benchmark one-year loan rate and the one-year deposit rate by a quarter of a percentage point to 5.35% and 2.5%, respectively.

        The central bank singled out rising deflationary pressure as a trigger for the move, saying that plunging commodity prices world-wide "provided room" to spur growth by lowering interest rates.

        China now joins countries in the eurozone and Japan in easing monetary policies due to deflationary pressure, while the U.S. Federal Reserve is moving toward raising interest rates as America's economy recovers.

        Elsewhere, Russian markets remained in sharp focus Monday after opposition leader and outspoken critic of the government Boris Nemtsov was gunned down on a bridge next to the Kremlin late Friday.

        The ruble, which has now tumbled close to 40% over the last six months against the dollar, burdened by Western sanctions and geopolitical turmoil, was trading an additional 2% lower against the dollar on Monday.

        Tim Ash, head of emerging market research, ex-Africa, for Standard Bank, said that the event "raises serious questions as to how investors should view Russia and what their investment strategies toward Russia should be going forward."

        "Foreign and Western business now can simply not predict and plan for likely outcomes in Russia--this is a very different Russia to that which had appeared to be the case just over one year ago," he said.

        Russian stocks, however, proved resilient. The Micex was trading 1.4% higher, according to the Moscow Exchange's website early on Monday, while the dollar-denominated RTS Index was 0.7% higher on the day.

        Later in Europe on Monday, investors will assess manufacturing sentiment data from the euro area.

        Paul Donovan, an economist at UBS, said that France is expected to show contraction but other euro area economies mild expansion. He warned, however, that the numbers "need to be treated with caution given their tendency to overreact to underlying economic data."

        The Stoxx Europe 600 index and London's FTSE 100 were broadly unchanged in early trade, while Germany's DAX advanced tentatively and France's CAC lagged behind marginally.

        In commodity markets, Brent crude suffered a fresh slide to trade 0.8% lower on the day at $62.12 per barrel. Gold was 0.6% higher at around $1,220 per troy ounce.

        Write to Josie Cox at josie.cox@wsj.com

        (END) Dow Jones Newswires

        March 02, 2015 03:46 ET (08:46 GMT)

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