BLBG: Dollar Falls to Lowest in Almost Year on Borrowing Costs
Sept. 9 (Bloomberg) -- The dollar dropped to the weakest level in almost a year against the currencies of six major U.S. trading partners as record low borrowing costs encouraged investors to sell the greenback and buy higher-yielding assets.
South Africa’s rand and the Norwegian krone were among the biggest gainers versus the dollar among the most-traded currencies as investors became more comfortable with risk. The pound advanced to near the strongest level against the dollar in almost three weeks as U.K. consumer confidence rose to the highest level in more than a year.
“The way everyone is funding their risky investments is by using dollars,” said Bilal Hafeez, London-based global head of foreign-exchange strategy at Deutsche Bank AG, the world’s largest currency trader. “They are borrowing dollars to invest in other markets.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the euro, yen, pound, franc, Canadian dollar and Swedish krona, fell to 76.858 at 10:20 a.m. in New York, after earlier dropping as much as 0.7 percent to 76.810, the lowest level since Sept. 29, 2008. The gauge dropped 14 percent from its high in 2009 of 89.624.
The greenback became the cheapest funding currency in London this week. The three-month London interbank offered rate, or Libor, for loans in dollars fell today to a record low of 0.299 percent, compared with 0.307 percent for the franc and 0.370 percent for the yen, according to the British Bankers’ Association.
Dollar Versus Euro
The dollar slipped 0.7 percent to $1.4582 against the euro, from $1.4478 yesterday, after reaching $1.4594, the weakest level since Dec. 18. The Swiss franc gained as much as 0.7 percent to 1.0402 versus the dollar, the strongest level since July 29, 2008. Japan’s currency gained 0.3 percent to 92.09 against the dollar, from 92.32. The yen traded at 133.75 per euro, compared with 133.67.
The yen may rise against the dollar as it’s replaced as the favored currency for carry trades, according to Royal Bank of Scotland Group Plc.
“Over the next few months, we see the yen strengthening against the dollar and European currencies,” Greg Gibbs, a foreign-exchange strategist at RBS in Sydney, wrote today in a report. “We expect the yen to continue to be replaced by the dollar, and even possibly European currencies, as the preferred funding vehicle for higher-risk, higher-yielding assets and currencies.”
The dollar dropped 0.9 percent to 7.4520 rand and 0.8 percent to 5.8843 krone on speculation investors will increase carry trades, in which they sell the currency of a nation with low borrowing costs and buy assets where returns are higher. The target lending rate of zero to 0.25 percent in the U.S. compare with 7 percent in South Africa and 1.25 percent in Norway.
Stock Gains
Europe’s Dow Jones Stoxx 600 index climbed 0.5 percent, erasing a decline. The regional gauge surged 51 percent since March 9, when it touched the lowest level this year. The Standard & Poor’s 500 Index gained 0.4 percent.
The pound increased as much as 0.5 percent to $1.6565 as Nationwide Building Society said an index of U.K. sentiment rose last month to the highest since May 2008. Prime Minister Gordon Brown sees “interesting and encouraging signs” on the economy, a spokesman, Simon Lewis, told reporters in London today. Sterling touched $1.6587 yesterday, the highest since Aug. 21.
Chicago Federal Reserve President Charles Evans said policy makers will act “aggressively” to contain inflation while the U.S. economy rebounds.
It’s too early for the central bank to tighten credit, Evans said in the text of remarks to the Council on Foreign Relations in New York. The Fed averted deflation, and a repeat of the rapid inflation in the 1970s is unlikely, he said.
Tomorrow, Atlanta Fed President Dennis Lockhart will speak in Jacksonville, Florida, and Fed Vice Chairman Donald Kohn will give an address in Washington. Fisher said last week the U.S. may see “a prolonged period of sluggish economic performance.”
To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
