BLBG: Dollar, Yen Drop as Central Banks Act to Spur Economic Growth
By Ye Xie and Bo Nielsen
Dec. 2 (Bloomberg) -- The dollar and the yen declined the most against the euro in a week as global central banks acted to stem the economic slump and stocks rebounded, reducing the haven appeal of the currencies.
Australia’s dollar rose for the first time in three days versus the greenback after the central bank cut its cash target to the lowest level since 2002. The yen fell against the South African rand and Norway’s krone after the Bank of Japan said it will accept lower-grade corporate debt as collateral for loans.
“We are seeing modest recovery of risk appetite, weighing on the dollar and the yen,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.
The dollar fell 0.6 percent to $1.2689 per euro at 11:35 a.m. in New York, from $1.2611 yesterday. The yen dropped 1.1 percent to 118.75 per euro from 117.52. Japan’s currency slid 0.3 percent at 93.49 against the dollar from 93.19 after touching 92.63, the strongest since Oct. 28. Ruskin still favors the yen because “risk aversion won’t dissipate rapidly.”
Russia’s ruble was little changed at 31.31 against a basket consisting of 55 percent dollars and 45 percent euros. Russia should devalue the ruble by at least 20 percent to kick-start economic growth, according to Troika Dialog, the country’s oldest investment bank, and Goldman Sachs Group Inc. Bank Rossii widened the trading band against the basket three times last month, allowing the currency to weaken 3 percent.
Stronger Aussie
Australia’s dollar appreciated 0.4 percent to 64.29 U.S. cents after the Reserve Bank cut the target lending rate by a percentage point to a six-year low of 4.25 percent. Policy makers said the cash target is now at a level that will stimulate growth.
Central bankers will lower interest rates this week by 1.5 percentage points to 5 percent in New Zealand, 1 percentage point to 2 percent in the U.K. and a half-percentage point to 2.75 percent in the euro region, according to the median forecast of analysts surveyed by Bloomberg.
The pound appreciated 0.5 percent to $1.4952 two days before the Bank of England’s decision on interest rates. Sterling plunged 24 percent against the dollar this year as the U.K. slid into a recession.
The central bank will weigh the risk of a weak pound as it considers cutting its main rate to an all-time low, former Bank of England policy maker Willem Buiter said today in a speech at a London conference.
Risk of ‘Rout’
“The deterioration of sterling we’ve seen so far has been extremely welcome from the British point of view,” Buiter said. “The risk is that it could become a rout.”
The yen depreciated 1.2 percent to 8.98 versus the rand and 1.5 percent to 13.29 against the krone on speculation investors will slow the unwinding of 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 today at 0.3 percent, compared with 12 percent in South Africa and 4.75 percent in Norway. The bank will begin accepting BBB or higher- rated corporate bonds as collateral for loans to banks to unlock credit markets.
“We’re seeing tentative improvement in market sentiment,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “I don’t think this represents a new trend. The trend is continued difficulty for the global economy and financial markets, leading to further strength of the dollar and the yen.”
Yosano on Yen
The yen’s 16 percent rally versus the dollar this year is hurting exporters, although the strength in the currency isn’t a bad thing in itself, Economic and Fiscal Policy Minister Kaoru Yosano told reporters today in Tokyo.
“As Japan’s economy falters, risk aversion will likely rise among Japanese investors,” wrote Stephen Jen, global head of currency research at Morgan Stanley in London, in a note yesterday. “The yen should be bought now.” He expects the yen to climb to 90 versus the dollar by year-end.
The Standard & Poor’s 500 Index rose 2.3 percent a day after the biggest rout since mid-October. Europe’s Dow Jones Stoxx 600 Index gained 1.1 percent, reversing an earlier drop today of as much as 2.3 percent.
Federal Reserve Chairman Ben S. Bernanke said yesterday in Austin, Texas, he may use less conventional policies, such as buying Treasury securities, to revive the economy because his room to lower the target lending rate from the current 1 percent level is “obviously limited.”
“I am still very dollar-bullish,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at MF Global Ltd. in Chicago. “The market discussion was the dollar may get hurt because of the inflationary effect of the Fed pumping money into the system. The problem is the banks aren’t lending, and credit isn’t loosening. The dollar will continue to benefit from safe- haven flows.” The dollar may climb to $1.20 per euro by year- end, Hoversen said.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net
