BLBG: Dollar Falls to 2-Week Low as Recovery Signs Spur Yield Demand
Oct. 8 (Bloomberg) -- The dollar fell to a two-week low against the euro amid signs the global economy is recovering, boosting demand for higher-yielding assets.
The Dollar Index approached its weakest level in 14 months after Alcoa Inc. reported third-quarter earnings that beat analysts’ estimates, fanning gains for stocks. The euro advanced versus the yen before a meeting of the European Central Bank and a report forecast to show increased industrial output in Germany. Australia’s dollar climbed to a 14-month high after data showed employment unexpectedly increased.
“Dollar-negative sentiment has been ramped up,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in an e-mailed report today. The Alcoa and Australian employments reports “have lifted confidence in global economic recovery prospects, fueling further dollar- negative capital flows into higher-yielding assets, encouraging the dollar’s use as a funding currency.”
The U.S. currency weakened to $1.4773 per euro at 10:03 a.m. in London, from $1.4691 in New York yesterday. It earlier traded at $1.4787, the lowest level since Sept. 24. The euro rose to 130.29 yen, from 130.18 yen. The dollar fell to 88.19 yen from 88.61 yen. Yesterday, the U.S. currency declined to as low as 88.01, the weakest level in more than eight months.
The MSCI World Index climbed as much as 1 percent as every major stock market in Europe rose after New York-based Alcoa, the largest U.S. aluminum producer, posted an adjusted profit of 4 cents a share from continuing operations, compared with an average estimate of a 9-cent loss in a Bloomberg survey. Gold climbed to a record for a third straight day as the dollar slid.
Bullish on Euro
“The global economy is rebounding,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “That’s what the equity market is telling us and commodity markets are telling us. On that basis, I’m bullish on the euro.”
While likely leaving its main refinancing rate at a record low of 1 percent today, signs of a recovery may allow the Frankfurt-based ECB to detail how it plans to unwind its policy of offering banks as much money they want for up to 12 months at its benchmark rate, according to Julian Callow, chief European economist at Barclays Capital.
The ECB will announce its rate decision at 1:45 p.m. in Venice, Italy today. Central bank President Jean-Claude Trichet will speak to reporters 45 minutes later.
German industrial output expanded 1.8 percent in August following a 0.9 percent drop in July, the Economy Ministry in Berlin may report today, according to the median forecast of 36 analysts surveyed by Bloomberg.
‘Strong Dollar’
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners including the euro and yen, declined 0.7 percent, falling below 76 for the first time since Sept. 23, when it dropped to 75.827, the lowest level since Aug. 11 last year.
The U.S. currency’s weakness has traders doubting the sincerity of the so-called ‘strong dollar policy’ subscribed to by the Obama administration. Timothy Geithner, the current Treasury secretary, said Oct. 3 that “it is very important to the United States that we continue to have a strong dollar.”
“Since the dollar has been weak and weakening for years, Geithner was using a code phrase, a carry-over from the Bush administration,” said David Malpass, president of research firm Encima Global in New York. “It means that the U.S. approves of a constantly weakening dollar but doesn’t want a disruptive collapse,” said Malpass, the former chief economist at Bear Stearns Cos. and deputy assistant Treasury secretary from 1986 to 1989.
Interest Rates
The Federal Reserve will start raising its benchmark rate in the third quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.
Benchmark interest rates are as low as zero in the U.S., compared with 1 percent in the euro zone, 3.25 percent in Australia and 2.5 percent in New Zealand, making assets in the 16-nation region and those South Pacific countries attractive to investors seeking higher returns.
Australia’s dollar rose 1.3 percent to 90.30 U.S. cents, the highest level since August 2008, from 89.12 cents yesterday in New York, after the statistics bureau in Sydney said the number of people employed rose by 40,600 last month from August 2008. The Reserve Bank of Australia two days ago became the first Group of 20 central bank to raise interest rates since the start of the financial crisis.
Adding to signs the region’s economy is recovering, Japan’s Finance Ministry said today the nation’s current-account surplus widened 10.4 percent to 1.171 trillion yen ($13.3 billion) in August from a year earlier. The median estimate of 22 economists surveyed by Bloomberg News was for 1.15 trillion yen.
‘Uncomfortable’ Level
New Zealand’s dollar climbed to 74.01 U.S. cents from 73.64 yesterday. Earlier it touched 74.21 cents, the strongest since July 2008. New Zealand Finance Minister Bill English said he’s “uncomfortable” with the currency’s level.
“Generally when we’ve had a recession, a low dollar has helped us kick-start out of that recession,” English said in an interview in London yesterday. “That’s clearly not going to be the case this time.”
The yen traded near the highest level in more than eight months against the dollar on speculation the Bank of Japan will be quicker than the Federal Reserve in withdrawing emergency stimulus measures.
Pound Gains
Bank of Japan Governor Masaaki Shirakawa said on Oct. 3 the need for programs to buy commercial paper and corporate bonds has eased. The central bank may decide as soon as this month to let the measures expire at the end of the year, people with direct knowledge of the discussions have said. New York Fed President William Dudley said on Oct. 5 that U.S. interest rates should stay low for a while to ensure a “robust recovery.”
“It’s possible that the BOJ may be faster than the Fed in taking exit strategies,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Corp. in Tokyo. “This may fuel buying of the yen.”
The pound rose 0.5 percent to $1.6052, a second day of gains, amid speculation the Bank of England will hold interest rates and its asset-purchase program at current levels today. Sterling is down 2.7 percent versus the U.S. currency in the past month. The bank’s decision is due at noon in London.
“People have taken sterling a lot lower already and maybe now they think it’s clear the BOE won’t extend quantitative easing,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London.
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
