Markets Signal Tentative Return of Risk Taking

Asian share markets rallied and the euro surged on Thursday on tentative signs that investors are rediscovering an appetite for risk in response to global efforts to prevent the financial crisis from leading to a deep recession.

Hours after the Federal Reserve met market expectations by slashing its main policy rate to 1 percent, Taiwan and Hong Kong took up the rate-cutting baton and speculation persisted that Japan would follow suit on Friday.

As well as lowering the cost of money, the U.S. central bank made more of it available: it announced four new currency swap lines with Brazil, Mexico, South Korea and Singapore worth $30 billion each to help ease dollar funding shortages that have crippled money markets around the globe.

The policy move electrified South Korea's markets, which have been pounded by fears that banks and companies would be unable to get their hands on enough dollars to meet maturing debts.

The won jumped 10 percent against the dollar, while Seoul shares rose 12 percent.

"With this deal, Korea secured a 'safe dollar supplier' in the Fed and that will ease concerns over a dollar liquidity shortage," said June Park, an economist at Woori Investment & Securities.

Euro In Demand

The won was not the only currency to benefit as currency traders poked their heads above the parapet.

For weeks the dollar has been unstoppable as U.S. firms and banks have brought money home to pay down debts and investors sought a safe haven. The yen, too, has benefited from the unwinding of risky bets.

But the euro jumped 3 percent against the yen, aided by expectations that the Bank of Japan will cut interest rates on Friday, and rose to $1.3245, 7.5 percent above a 2-1/2-year low of $1.2329 plumbed on Tuesday.

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The dollar's strength was sapped by the cut in the fed funds rate, the rate at which banks borrow from each other overnight, to the lowest level since June 2004.

"The markets got the rate cut that they expected and a policy statement that was decidedly downbeat on the economy," said Stuart Hoffman, chief economist at PNC Financial Group in Pittsburgh, Pennsylvania.

The Fed said the pace of U.S. economic activity appeared to have slowed markedly and it expected inflation to moderate as a result of lower energy and commodities prices.

U.S. data later on Thursday is expected to show that the economy shrank in the July-to-September quarter.

Taiwan cut rates by a quarter-point on Thursday, its third reduction in about a month. Hong Kong, whose rates move in tandem with the Fed's, duly lowered its base rate by half a point. China had already cut its borrowing costs on Wednesday, for the third time in six weeks, as had Norway.

The European Central Bank, Australia and Britain are expected to cut next, fearful that the worst financial crisis in 80 years will cause a long global recession.

Policy Response

In addition to monetary easing, governments are rummaging in their policy kits to see how they can best help their economies.

U.S. regulators are finalizing a new federal program to provide up to $600 billion in government guarantees of home mortgages to help prevent foreclosures, a source familiar with the talks said. The program could be announced as soon as Thursday, the source said.

Governments have already pledged about $4 trillion to support banks and restart money markets to stem the crisis, which was set off by the bursting of a bubble in the U.S. housing market.

Britain indicated it may lift self-imposed limits on government borrowing to counter a recession, while South Korean President Lee Myung-bak said his government would bring forward budget spending and consider ramping up construction spending.

On top of the four swap lines arranged by the Fed, the International Monetary Fund approved an emergency short-term liquidity facility for emerging market economies so they can tap cash to help them weather the credit crisis.

The IMF, together with the European Union and World Bank, has already agreed to a $25.1 billion loan-for-reforms package for Hungary and is in various stages of negotiations to help Ukraine, Belarus, Pakistan and Iceland.
     
Asia Rampant

Asian markets took heart from the latest burst of policy activism.

Japan's Nikkei 225 Average closed 10 percent, with Hong Kong hot on its heels, up 9 percent.

Major U.S. stock indexes had rallied more than 2 percent on Wednesday before falling back to close lower on worries that slowing growth will take a heavy toll on corporate profits.

Two of the largest U.S. auto parts makers, BorgWarner and
Tenneco , said the economic crisis would mean more job cuts and plant closings.

"Bigger picture, I don't think anyone believes that any interest rate cuts are going to affect the underlying issues surrounding mortgage-related and consumer-related credit," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

General Motors , which said global auto sales dropped about 7
percent in the third quarter, has asked the U.S. government for some $10 billion to support a merger with smaller rival Chrysler, sources said.

The former head of the U.S. National Bureau of Economic Research, Martin Feldstein, was quoted as saying the United States has entered a recession that will last longer and do more damage than any since World War Two.

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