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$ Advances as H5N1 Scare Fuels Demand for Safer As

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    Posted: May 23 2006 at 8:05pm

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http://www.bloomberg.com/apps/news?pid=10000101&sid=aOQRytNbw_YM&refer=japan
 
Dollar Advances as Bird-Flu Scare Fuels Demand for Safer Assets
May 24 (Bloomberg) -- The dollar gained for a second day after the World Health Organization said seven Indonesians may have contracted bird flu from other people, raising concerns of a global pandemic and bolstering demand for safer investments.

Almost all the cases of the lethal bird flu virus confirmed since late 2003 have been traced to direct contact with sick or dead birds, and evidence of transmission between humans may spur demand for the safety of dollars. A flu pandemic such as the one that struck in 1918 might shrink the global economy by an eighth, according to a report by the Australian National University.

``Markets are focusing on the bird flu and are seeing the downside risks to the global growth view,'' Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd., said in Sydney. ``We're probably seeing some safe-haven momentum and the U.S. dollar is the preferred currency in difficult times.''

Against the euro, the dollar strengthened to $1.2801 at 11:34 a.m. in Tokyo from $1.2815 in New York late yesterday. The U.S. currency also rose to 112.08 yen from 111.99.

A team of international experts has been unable to find animals that could have been the source of the H5N1 bird flu virus on the island of Sumatra in Indonesia, the WHO said.

Six of the Indonesian family members who caught the virus died after they all had contact with severely ill patients, it said in a statement yesterday. WHO officials say another flu pandemic is now more imminent than at any time since 1968, when the last of the previous century's three pandemics occurred.

`All Eyes'

``All eyes will be on WHO announcements today about this outbreak, so we could see some big moves,'' said Matthew Jones, senior currency dealer at Customs House Global Foreign Exchange in Sydney. ``Any bad news will see a flight to quality and see the U.S. dollar gaining.''

Evidence of the virus strain being passed from human-to- human in a chain of three or more people may prompt the WHO to convene a panel of experts and consider raising the pandemic alert level, spokeswoman Maria Cheng said yesterday in Geneva.

``Considering the evidence and the size of the cluster, it's a possibility,'' Cheng said. ``It depends on what we're dealing with in Indonesia. It's an evolving situation.''

A flu pandemic such as the one that killed 50 million in 1918 may take more than 142 million lives, according to the report by Australian National University and the Lowy Institute.

Gains in the dollar were curbed as some traders said the reaction to the Indonesian news was overblown as there isn't any suggestion the virus is easily transmitted between people.

`Reaction Overdone'

The investigation has so far found no evidence of a spread within the general community in Sumatra or that efficient human- to-human transmission has occurred, the WHO said.

``I can't see major flows coming in on the back of bird flu in Indonesia,'' said George Kapasakis, a senior trader at Mizuho Corporate Bank in Sydney. ``The reaction is overdone on pure logic. Any uptick in the U.S. dollar is a good opportunity to sell it.'' The dollar will decline as far as $1.37 against the euro and 104 yen within six months, he forecast.

The euro may extend declines as a report on German business confidence that is expected to show a deterioration prompts traders to scale back bets the European Central Bank will raise interest rates. Inflation accelerated to 2.4 percent last month.

The Ifo index, based on responses from 7,000 companies, slid to 105 in May from 105.9 in April, according to the median of 43 forecasts in a Bloomberg survey, as record oil prices and the euro's appreciation tempered the outlook for growth.

`Euro's Downside'

``A weaker-than-expected Ifo number will likely exacerbate the euro's downside,'' said Sue Trinh, a currency strategist at RBC Capital Markets in Sydney. The euro may fall to $1.2750 against the dollar today, she said.

The central bank increased its benchmark rate by a quarter- percentage point in December and again in March, to 2.5 percent, and aims to keep inflation below 2 percent.

Investors expect policy makers to raise the rate 25 basis points to 2.75 percent at its meeting in Madrid on June 8 and to take it to at least 3.25 percent by the year-end, interest-rate futures show. A basis point is 0.01 percentage point.

The yield on the three-month contract for December rose two basis points to 3.415 percent yesterday. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.
 

To contact the reporter on this story:
Chris Young in Sydney at  cyoung12@bloomberg.net
Ron Harui in Tokyo at
Last Updated: May 23, 2006 22:35 EDT 
 

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