BLBG: Dollar Falls on Concern Bank Plan Will Discourage Investment
By Lukanyo Mnyanda and Yasuhiko Seki
Jan. 22 (Bloomberg) -- The dollar fell against the euro, snapping six days of gains, on concern that a U.S. proposal to rein in trading by financial institutions will discourage investors from buying assets in the world’s largest economy.
The currency dropped from the strongest level since July against the 16-nation euro. Japan’s yen headed for a second weekly gain versus its 16 major counterparts as stocks slumped across the world, boosting demand for the currency as a refuge. The pound fell for a second day against the euro after a report showed U.K. retail sales in December grew less than forecast.
The U.S. “announcement has been deemed to be dollar- negative, and it has fallen across the board,” said Stuart Bennett, a London-based strategist at Calyon, the investment- banking arm of Credit Agricole SA. “The kneejerk reaction is that it’s going to hurt the biggest banks’ earnings. It has hurt equities and took the dollar along.”
The dollar depreciated 0.3 percent to $1.4132 per euro at 8:39 a.m. in New York, from $1.4084 yesterday, when it appreciated to $1.4029, the strongest level since July 30. It’s still up 1.9 percent this week. The dollar was at 90.23 yen, from 90.43 yesterday, after declining to 89.79 earlier, the weakest level since Dec. 18.
President Barack Obama called for limiting the size and trading activities of financial institutions as a way to reduce risk taking and prevent another financial crisis. The Standard & Poor’s 500 Index fell 1.9 percent yesterday, the most in almost three months. Stock-index futures declined today.
‘Heavy Losses’
The proposals will be part of an overhaul of regulations and would prohibit banks from proprietary trading or investing in hedge funds and private-equity funds.
“Contrary to developments over the previous months, the dollar was unable to benefit from a rise in risk aversion,” strategists including Antje Praefcke at Commerzbank AG in Frankfurt wrote in a client note. “Measures of this nature would limit the liquidity of the U.S. financial markets, thus affecting the attractiveness of the dollar.”
The yen headed for a weekly gain versus the euro, trading 2.7 percent stronger at 127.14. It appreciated to 126.56 earlier today, the strongest since April 28. Japan’s currency also headed for a second week of gains against the Australian dollar. It traded at 81.28 yen per dollar, from 83.76 a week ago.
The yen tends to gain during times of economic and financial turmoil because Japan’s trade surplus makes it less reliant on foreign capital.
China Concern
China’s central bank yesterday guided interest rates higher to curb inflation and temper economic growth, pushing stocks lower and sapping demand for higher-yielding assets.
Gross domestic product in China grew 10.7 percent last quarter from the year before, the nation’s statistics bureau said yesterday. That was faster than the 10.5 percent median forecast of economists in a Bloomberg News survey.
“Fears that China’s central bank will tighten monetary policy to cool the overheating economy are pushing commodity currencies lower,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Risk aversion is the dominant theme, so the yen is being bought.”
The People’s Bank of China yesterday allowed three-month bill yields to rise four basis points from a week earlier to 1.4088 percent, as part of measures to curb record loan growth and inflation.
U.K Retail Sales
The British pound fell after the U.K. Office for National Statistics said December retail sales by volume rose 0.3 percent from November after dropping by the same margin the previous month. The median forecast was for a 1.1 percent gain, according to a Bloomberg News survey of 27 economists.
Sterling weakened 0.3 percent to 87.24 pence per euro. It weakened by 0.1 percent to $1.6177, after earlier trading as high as $1.6284.
UniCredit SpA, the fourth-best forecaster on the pound versus the dollar last year, cut its 2010 prediction today, citing the U.K.’s deteriorating growth prospects.
“We lowered our target based on expectations the recovery in U.K. economic activity will remain very moderate at least for most of the first half,” Roberto Mialich, a senior global- currency strategist in Milan, said by e-mail.
Europe’s single currency headed for its biggest weekly decline in five weeks against the dollar on concern Greece will fail to contain its budget deficit, diminishing the appeal of the 16-nation region’s assets.
European finance ministers said on Jan. 19 the crisis in Greece is affecting other nations, the same day Moody’s Investors Service said the success of the government’s budget plan “cannot be taken for granted.” The International Monetary Fund said on Jan. 20 that Portugal should begin reining in its deficit this year.
“Worries over the fiscal deficits of Greece, Portugal and some other euro-zone countries are mounting,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “The trend is for the euro to weaken.”
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
