BLBG: Dollar Posts Weekly Gain as Stock Plunge Spurs Haven Demand
By Ye Xie and Michael J. Moore
Nov. 21 (Bloomberg) -- The dollar recorded a third weekly gain against the euro as a plunge in global stocks increased demand for the safety of U.S. government debt.
The yen increased versus the euro, the dollar, the Brazilian real and the Mexican peso this week on speculation investors will sell higher-yielding assets and pay back low-cost loans in Japan’s currency. Japan’s Finance Minister Shoichi Nakagawa said today “abrupt movements” in stocks and currencies are undesirable.
“It’s all about risk in this emotional market,” said Jacob Oubina, a currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “Risk aversion is still prevalent.”
The dollar traded at $1.2582 per euro at 4:17 p.m. in New York, gaining 0.2 percent from $1.2605 on Nov. 14. The yen was at 95.94 versus the dollar, up 1.2 percent from 97.14. It traded at 120.61 against the euro, increasing 1.5 percent this week from 122.39.
The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose to 88.463 today, the highest level since April 2006. It posted its third weekly gain.
The Standard & Poor’s 500 Index plunged 8.4 percent this week after U.S. economic reports depicted a deepening recession and lawmakers postponed a vote on a plan to salvage the auto industry. Treasuries surged, pushing the 10-year note’s yield to 2.99 percent yesterday, the lowest level since at least 1962.
Dollar Versus Euro
The dollar dropped 1.1percent against the euro today as U.S. stocks increased 6.3 percent. The yen decreased 2.4 percent versus the greenback and 3.3 percent against the euro.
The Australian dollar recorded a second weekly decline, dropping 2.8 percent to 62.98 U.S. cents. The Aussie gained 3.1 percent today after the Reserve Bank purchased the currency as it approached a five-year low. The Australian dollar lost 16 percent last month even as the central bank bought A$3.15 billion ($1.96 billion) of its currency in October, the biggest net purchase on record.
The yen increased 11 percent to 38.75 against the real and 6.1 percent to 6.98 versus the peso this week on speculation investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.
The Bank of Japan kept its target lending rate at 0.3 percent today and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter. Japan’s rate compares with 13.75 percent in Brazil and 8.25 percent in Mexico.
‘Cross-Yen’ Losses
“There’s strong possibility that the yen will continue appreciating as the global recession may deepen,” said TohruSasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. “It’s an environment where losses in cross-yen currencies are likely to be even bigger than those in the dollar-yen.”
The yen touched a 13-year high of 90.93 per dollar on Oct. 24, raising speculation Japan may sell the currency to support exporters. The government needs to “respond decisively against sharp movements” in stocks and currencies, Nakagawa, Japan’s finance minister, told reporters in Tokyo today.
Saizeriya Co., an Italian restaurant chain operator in Japan, said it expects to book a 14 billion yen ($147 million) charge for losses on derivative foreign-exchange contracts after the yen strengthened. The losses came on two currency swap contracts that left the company positioned to benefit from a strong Australian dollar, Saizeriya said in a statement to the Tokyo Stock Exchange.
Japan’s currency will advance to 87 against the dollar and 103 per euro by year-end, according to JPMorgan.
Euro and Oil
The euro may gain 16 percent against the dollar in the next year as demand in China drives up oil prices, making the U.S. currency less attractive, Barclays Capital said.
Two-thirds of the euro’s 22 percent slide since the July peak of $1.6038 stems from falling oil, Barclays said. Crude oil may rebound after dropping 67 percent from a record $147.27 a barrel in July as the Chinese economy expands, the firm said.
The dollar may weaken as foreign investors demand higher returns, according to James Dutkiewicz, who manages C$5 billion ($4.9 billion) in fixed-income assets in Toronto at CI Investments Inc., Canada’s second-largest mutual-fund manger.
The U.S. will sell $1.5 trillion in debt this fiscal year, which began Oct. 1, Treasury Secretary Henry Paulson said on Nov. 17. The Treasury announced in early November plans to borrow $550 billion in the current quarter and $368 billion in the January-March period.
“The next story will be a powerful bearish U.S. dollar taking over,” Dutkiewicz said. “When the huge financing burden really kicks in, there’s a powerful, fundamental risk for both the dollar and Treasuries.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
