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G7 pledge on currencies hurts dollar, helps stocks

LONDON (AP) -- A pledge by the Group of Seven most powerful economies to not intentionally weaken their currencies pushed stocks higher on Tuesday while dragging the dollar lower against the Japanese yen and the euro.

The G-7 nations, which include the U.S., Japan and Germany, said their economic policies should be “oriented towards meeting domestic objectives and not towards setting specific exchange rates.”

That was meant to ease concerns that major economies were retooling their monetary policies to specifically weaken their national currencies to help domestic exporters.

Such worries began after Japan announced in December a new ultra-loose monetary policy that caused a sharp drop in the yen against other major currencies. With all major economies struggling to recover from the financial crisis, that raised the specter that global central banks might race to loosen monetary policies to weaken national currencies.

Last week, French President Francois Hollande even said that the 17 eurozone governments should manage their currency's exchange rate.

A so-called “currency war” would damage the global economy, whose recovery from the financial crisis is still fragile, by hurting trade.

European stocks rose after the statement, with Germany's DAX gaining 0.4 percent to close at 7,660.19 and France's CAC 40 rising 1 percent to 3,686.58.

Britain's FTSE 100 rose 1 percent to 6,338.38, buoyed by an 8.6 percent rise in Barclays after the scandal-ridden bank announced a restructuring of its investment banking division, including 3,700 job cuts.

Wall Street advanced as well, helped by upbeat earnings reports from Goodyear and Coca-Cola. The Dow was up 0.2 percent at 14,005.04 while the broader S&P 500 was 0.1 percent higher at 1,518.52.

Despite the positive stock market impact, analysts warned that the G-7 statement would change little in the longer term, since any country could claim that its loose monetary policy was meant to help the domestic economy, not set the exchange rate. There is little to stop the Japanese central bank, for example, from continuing to pursue its ultra-loose monetary policies.

“One might well argue that this is a case of not being able to see the wood for the trees,” said Marc Ostwald, strategist at Monument Securities in London.

The lack of clarity over the implications of the G-7 statement was reflected in the performance of the yen, which initially remained stable against the dollar as investors interpreted the wording as an endorsement of the country's policies.

The yen rallied, later on, however, on speculation that the G-7 was in fact trying to put pressure on Japan to not let its currency weaken too rapidly. By late afternoon in Europe, the dollar was down 1.2 percent at 93.18 yen. The euro was up 0.3 percent at $1.3451.

The Japanese currency has dropped almost 8 percent against the dollar this year as Japan's Prime Minister Shinzo Abe called for the central bank to ease monetary policy more aggressively.

Central bank governor Masaaki Shirakawa, who has appeared at odds with Abe's views on monetary policy, is resigning next month, giving the government an opportunity to find a successor more sympathetic to its aims.

The Bank of Japan holds a two-day policy meeting starting Wednesday but analysts said no new initiatives were expected in light of the impending leadership change.

Tokyo's Nikkei 225, which closed before the G-7 statement was released, rallied 1.9 percent on Tuesday.

Markets, meanwhile, were unfazed by a nuclear test conducted by North Korea on Tuesday. Pyongyang said it successfully detonated a miniaturized nuclear device at a northeastern test site.

South Korea's Kospi fell 0.3 percent to 1,945.79 while benchmarks in Indonesia, Thailand and India rose. In Australia, the benchmark S&P/ASX 200 finished nearly unchanged at 4,959.

Markets in mainland China, Hong Kong, Singapore, Malaysia and Taiwan were closed for Lunar New Year holidays.

Benchmark oil for March delivery was up 35 cents to $97.38 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.31 on Monday.


Pamela Sampson in Bangkok contributed to this report.

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