Sept. 18 (Bloomberg) -- The dollar advanced from the weakest level in a year versus the euro as concern the global financial system remains weak led investors to reduce holdings of higher-yielding assets. Sterling fell to a four-month low against the euro as speculation Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, needs to raise more capital revived concern bank losses will stall the economic recovery. The dollar pared weekly losses against the Australian and New Zealand currencies as riskier assets became less attractive. “Given the bad news with respect to the U.K. today, we might see a day when people buy back the dollar a little bit,” said Jane Foley, research director in London at Gain Capital Group LLC, an online currency trading firm, in an interview on Bloomberg Television. The dollar traded at $1.4730 per euro at 9:38 a.m. in New York, from $1.4741 yesterday, paring its weekly loss to 1 percent. The dollar gained 0.2 percent to 91.26 yen, from 91.08. The yen was at 134.45 versus the euro, compared with 134.28. The U.S. currency rose for the first time this week against the euro as the 14-day relative strength index on the euro- dollar exchange rate climbed to 74 yesterday, the highest level since March. A reading of 70 indicates a rally may be approaching an extreme and a reversal may be imminent. The U.S. currency lost about 3 percent since the end of August. “The euro could well be set for a period of consolidation or even some correction,” Derek Halpenny, European head of currency strategy in London at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a client note today. A “period of correction in equity markets would reinforce the probability of some stability for the dollar.” Weaker Pound Sterling slid as much as 0.6 percent to 90.11 pence per euro, the weakest level since May 13, as Lloyds said it may exit a government program to insure 260 billion pounds ($425 billion) of its risky assets after the Financial Times reported that the bank’s capital position was too weak for it to do so. Lloyds’ shares fell as much as 4.1 percent. “Financial-sector worries are not going away anytime soon,” said Geoffrey Yu, a currency strategist in London at UBS AG, which Euromoney Institutional Investor Plc ranks as the world’s second-biggest currency trader. “The pound should remain under pressure in the short term.” The pound stayed lower after Britain posted the biggest budget deficit for any August since modern records began in 1993 as the recession reduced tax revenue and jobless benefit costs soared. The 16.1 billion-pound shortfall compared with a 9.9 billion-pound deficit a year earlier, the Office for National Statistics said in London today. The median of 16 forecasts in a Bloomberg survey was 17.6 billion pounds. EU on Banking The euro dropped from a one-year high versus the dollar after the European Union, in proposals to be put forward at next week’s Group of 20 meeting in Pittsburgh, said yesterday “restructuring of the banking sector must take place.” The European Central Bank held its benchmark interest rate at 1 percent since May this year and has used “non-standard measures” including lending banks as much cash as they want to end the region’s recession. Australia’s currency slid to 86.89 U.S. cents, from 87.28 cents yesterday, when it rose to 87.75 cents, the highest level since August 2008. New Zealand’s dollar was little changed at 71.05 U.S. cents, after reaching 71.58 cents yesterday, also the most since August last year. Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

Source