BLBG: Dollar, Yen Weaken as RBA Rate Decision Boosts Demand for Yield
The dollar and the yen weakened after Australia’s central bank unexpectedly halted its most aggressive round of interest-rate cuts, boosting demand for higher-yielding assets.
The U.S. and Japanese currencies snapped two days of gains versus the euro as U.S. stock futures climbed, increasing confidence among investors to resume so-called carry trades. Currencies of economies with higher relative interest rates, such as Australia, New Zealand, China and the Philippines, all strengthened. Demand for the greenback waned after the World Bank said the worst of the global financial crisis has passed.
“The story is quite clear, the fact that they kept rates on hold is a bit of a surprise,” said David Woo, the London-based global head of foreign-exchange strategy at Barclays Plc. “Higher-yielding currencies have been getting a bit of a lift.”
The dollar weakened to $1.2623 per euro as of 10:37 a.m. in London, from $1.2578 in New York yesterday. The yen depreciated to 123.29 per euro from 122.58. The U.S. currency traded at 97.67 yen from 97.45 yen.
Australia’s currency rose 1.9 percent to 64.17 U.S. cents and advanced 2.1 percent to 62.67 yen. New Zealand’s dollar climbed 1 percent to 49.74 cents and added 1.2 percent to 48.60 yen.
Buying Yuan
The yen also declined after public broadcaster NHK reported that Toyota Motor Corp., forecasting its first loss in 59 years, may seek about $2 billion of loans from the Japanese government.
The Reserve Bank of Australia left the overnight cash target at 3.25 percent at today’s meeting. Only four of 18 economists surveyed by Bloomberg News forecast the decision, with the remainder expecting a reduction. The European Central bank and Bank of England decide on interest rates in two days’ time.
Demand for higher-yielding currencies was also supported by speculation an Australian government report tomorrow will show the nation’s gross domestic product rose 0.2 percent last quarter from the prior three months.
“The Aussie dollar should sustain this bounce because people will quickly turn to the GDP number tomorrow,” said Sean Callow, a Sydney-based currency strategist at Westpac, Australia’s fourth-largest bank by assets. “It looks like it will be a positive number, which in global terms is unique.”
Target Rates
Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.25 percent in Australia and 3.5 percent in New Zealand, encouraging investors to borrow in Japan and the U.S. and invest in higher-yielding assets elsewhere. China’s interest rate is at 5.31 percent and the Philippines benchmark is 5 percent.
Canada’s dollar rose 0.4 percent to C$1.2877 versus the greenback before the nation’s central bank meets to review interest rates today. Policy makers will cut the key rate a half- percentage point to 0.5 percent, according to the median estimate in a Bloomberg News survey of 23 economists.
The U.S. currency weakened versus 14 of the 16 major currencies after the World Bank said growth may return by the end of this year.
“The period of acute financial crisis is behind us,” Andrew Burns, lead economist at the World Bank’s development prospects group, said today at the Australian Bureau of Agricultural and Resource Economics conference in Canberra. “Now we are moving forward under weaker conditions but growth will come back and we expect that toward the end of this year.”
Deepening Recession
Gains in the euro may be limited before a government report today that economists say will show German wholesale prices slid 2 percent in January, the sixth month of declines. Europe is being dragged into its deepest recession since World War II as the global financial crisis derails purchases of cars and factory machinery, forcing companies to cut output and jobs.
“The eurozone economy remains under considerable stress and the additional decline in inflation will enable the ECB to apply a more aggressive stance on monetary policy,” analysts led by Mansoor Mohi-Uddin, chief currency strategist in Zurich at UBS AG, wrote in a research note yesterday. “We expect the euro to remain under pressure, in particular versus the dollar.”
Investors boosted bets the European Central Bank will lower its 2 percent benchmark rate at its March 5 meeting. The yield on the three-month Euribor interest-rate futures contract due in March was at 1.62 percent today from 1.70 percent a week ago.
Housing, Jobs Data
The dollar also declined for the first time in three days against the euro before U.S. reports this week on housing and employment that may add to signs the world’s largest economy is sinking deeper into recession.
“The market is starting to realize again that the situation in the U.S. is far more deeply rooted than in Japan,” said Daisuke Uno, chief bond and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “The focus is now on all the bad news, especially with the jobs data coming up, which will increase dollar selling pressure.”
A National Association of Realtors report that may show its index of pending home sales dropped 3.5 percent in January after a 6.3 percent increase in December, according to a Bloomberg News survey. Companies in the U.S. cut an estimated 630,000 jobs in February, economists surveyed by Bloomberg predict the ADP Employer Services gauge will show tomorrow.
The Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined to 88.638, from 88.940 yesterday, when it reached 89.003, the strongest since April 2006.
Futures on the Standard & Poor’s 500 Index advanced 0.4 percent.
