By Bo Nielsen and Yasuhiko Seki Feb. 3 (Bloomberg) -- The dollar declined as stocks rose amid signs that the economic recovery is taking hold, fanning demand for higher-yielding currencies such as the South Korean won and the South African rand. The Dollar Index, which tracks the U.S. currency against those of six major trading partners, dropped for a third day before a report that may show U.S. service industries expanded at the fastest pace in more than a year. The pound rose versus the dollar after data showed U.K. consumer confidence jumped. The euro extended two days of gains against the dollar after European Union Monetary Affairs Commissioner Joaquin Almunia said the EU endorsed Greece’s deficit-cutting program. “Stocks are a little better, risk appetite is a little better and that’s supportive for high-yielders and works against the dollar,” said Niels Christensen, a currency strategist at Nordea Bank AB in Copenhagen, Scandinavia’s biggest bank. “Risk aversion has been a big theme in the markets the last couple of weeks but it looks as if its fading a bit today.” The dollar weakened 0.3 percent to $1.4000 per euro at 6:11 a.m. in New York, from $1.3964 yesterday. It was little changed at 90.48 yen. The pound rose to $1.5993, from $1.5973 yesterday. The euro gained 0.4 percent to 126.69 yen. The MSCI World Index of equities rose 0.2 percent for a third day of gains, its longest winning streak in almost a month. Standard & Poor’s 500 Index futures were unchanged. Risk Appetite The one-month implied volatility of an option on the dollar against Brazil’s real, a popular trade when risk appetite rises, fell for the fourth day, dropping to 16.8 from 17.7 at the close on Jan. 28, the highest since Nov. 9, according to Bloomberg prices. Lower volatility makes the return on a trade less risky. “Both near-term concerns over the sustainability of the economic recovery and sovereign-default risk are overblown,” Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd., wrote today. “Global liquidity conditions remain loose and supportive for risk assets for now.” The yen will weaken to 130 per euro “in weeks,” Hardman said. The Institute for Supply Management’s index of non- manufacturing companies, which make up almost 90 percent of the U.S. economy, rose to 51 from 49.8 in December, according the median estimate of 75 economists surveyed by Bloomberg News. Readings above 50 signal growth. A separate report may show companies last month cut the fewest jobs in two years. Pound Rises The pound advanced against the dollar after Nationwide Building Society said an index of consumer sentiment increased 3 points in January to 73, giving the Bank of England more reason to scale back measures to stimulate growth following a two-day policy meeting that ends tomorrow. “Speculation that some Bank of England policy makers will express a hawkish view on the economy and monetary policy is supporting the pound,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow in Tokyo. Britain returned to growth in the fourth quarter as house prices increased and unemployment began to decline, establishing a recovery in time for the election due by June. The Bank of England completed its 200 billion-pound ($325 billion) asset- purchase program on Jan. 26. Norway’s krone was little changed at 8.1464 per euro before a rate-setting meeting of the central bank in Oslo. Policy makers will probably keep the benchmark rate at 1.75 percent, according to all of the 16 economists in a Bloomberg survey. The bank will announce its decision at 2 p.m. local time. Krone ‘Attractive’ “The rates market is pricing around a 50 percent probability of a hike heading into this meeting,” Credit Suisse Group AG analysts led by London-based Sean Shepley wrote in a note to clients today. “Even if the Norges Bank keeps rates on hold this week, the krone continues to look attractive.” Investors should buy the krone against Sweden’s krona if it dips below 1.22 kronor, and buy the currency against the euro if it weakens beyond 8.2 per euro, the analysts wrote. The krone traded at 1.2381 against the krona, from 1.2389 yesterday. The gains in stocks worldwide may not be sustainable, according to Mohamed A. El-Erian, the chief executive officer of Pacific Investment Management Co., which runs the world’s biggest mutual fund. Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, El-Erian wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may be incorrect and prices will slump, he said. “Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian, 51, wrote. Greece Buoys Euro The Standard & Poor’s 500 Index fell 3.7 percent in January, more than any month since February 2009, after China set higher reserves for lenders and U.S. President Barack Obama proposed curbs on risk taking at banks. The euro rose for a third day versus the dollar after the European Commission approved Greece’s deficit-cutting program. Almunia said there is no need for Greece to seek outside help in dealing with its fiscal crisis. Greek Prime Minister George Papandreou yesterday pledged more action to tackle the deficit, including a freeze on state workers’ pay. Greece needs its measures to be backed by the International Monetary Fund, Nouriel Roubini and Arnab Das of Roubini Global Economics wrote in the Financial Times. A “credible austerity plan” for Greece should ideally be backed by a large IMF program to prevent a run on public debt and banks during the tough times ahead, they said. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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