The dollar rose from almost a two- month low versus the euro as some traders bet the greenback’s record plunge on the Federal Reserve’s plan to buy Treasuries was too big to sustain. The U.S. currency lost almost 5 percent in the past two days and was headed for a weekly decline on concern the Fed is flooding the market with dollars. Mexico’s peso increased after the central bank lowered its target overnight rate more than forecast to 6.75 percent to spur economic growth. “The dollar’s decline this week has more or less priced in the policy response,” said David Woo, global head of foreign- exchange strategy at Barclays Capital in London, in an interview on Bloomberg Television. “Over the next three months, I don’t see much downside for the dollar to the extent other central banks will be under pressure to follow the Fed’s lead and essentially go down the route of quantitative easing.” The dollar appreciated 0.9 percent to $1.3539 per euro at 11:45 a.m. in New York, from $1.3665 yesterday, when it touched $1.3738, the weakest level since Jan. 9. The U.S. currency rose 1.7 percent to 96.16 yen from 94.51. The euro increased 0.8 percent to 130.18 yen from 129.17. The greenback was headed for a 4.5 percent decline versus the euro this week, the biggest drop since Dec. 12. The dollar decreased 2.5 percent versus the yen. The euro advanced 2.6 percent versus the yen, its fifth weekly gain. Relative Strength The 14-day relative strength index on the euro versus the dollar, a chart used by analysts to project trends, was at 74.4 yesterday, the highest level in three months. A level above 70 tends to signal a currency’s gain is too fast to be sustained. The dollar’s gain today lowered the index to 71.75. Mexico’s peso gained 0.8 percent to 14.1327 against the dollar after the central bank lowered its target lending rate by three-quarters of a percentage point. The median forecast of 23 economists surveyed by Bloomberg News was for a cut of 0.25 percentage point. The peso increased 3 percent this week. Currencies of emerging markets from Asia to Latin America rallied this week on increased demand for higher-yielding assets. The Colombia peso increased 4.8 percent to 2,331 per dollar, while the South Korean won appreciated 5 percent to 1,412.17. Fed’s Balance Sheet The dollar dropped a record 3.4 percent versus the euro on March 18, when the U.S. central bank said its balance sheet will increase by as much as $1.15 trillion as it buys government debt and boosts mortgage-bond purchases, part of a policy known as quantitative easing. “We’ve seen a sharp sell-off in the dollar, and it’s overdue for a correction,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world’s largest custodial bank, with more than $23 trillion in assets under administration. “I don’t expect the most recent sell-off is the beginning of a sustained dollar decline.” Poland’s zloty rose 1.1 percent to 4.5816 per euro and the Hungarian forint was little changed at 301.72 after earlier gaining as much as 1.5 percent. European Union leaders agreed to double a credit line for countries in financial distress, trying to shore up former Communist economies. The Polish and Hungarian currencies are among the worst performers against the euro in the past six months, with the zloty tumbling 28 percent and the forint losing 20 percent. Eastern Europe Eastern Europe’s central banks will cut interest rates to record lows this year, slackening the defense of currencies, Bloomberg surveys show. Poland’s benchmark rate will fall to 3 percent by year-end from 4 percent, according to forecasts gathered by Bloomberg. Hungary’s target rate will decrease to 7.5 percent from 9.5 percent. The Australian dollar gained 4.5 percent to 68.76 U.S. cents this week, extending its advance in March to 7.6 percent as the Fed’s move to keep yields low encouraged investors to seek higher returns outside the U.S. New Zealand’s dollar rose 6.6 percent this week and touched 56.26 U.S. cents, the highest level since Jan. 13. Stocks rose this week while crude oil headed for a fifth week of gains, the longest winning streak in 11 months. The MSCI World Index climbed 5.5 percent, while the Standard & Poor’s 500 Index increased 3.6 percent. Oil rose above $50 a barrel yesterday. ‘Risk Appetite’ “The rise in risk appetite may be sustained in the near term, which would make the dollar weaker still,” a team led by Vincent Chaigneau, head of fixed-income and currency strategy at Societe Generale SA in London, wrote in a research note today. “We remain skeptical about the durability of that run, but still believe that the newly found dollar weakness could last.” The dollar may be poised to rise against a basket of currencies including the euro, yen, pound and Australian dollar because the U.S. economy may begin to outperform forecasts, according to UBS AG. A UBS index denoting economic data surprises climbed above a level yesterday at which “data tends to start outperforming what are very low expectations,” analysts at UBS, the world’s second-biggest foreign-exchange trader, wrote in a note yesterday. “From that point, U.S. yields tend to increase, and then the dollar outperforms.” U.S. housing starts unexpectedly rose in February to an annual rate of 583,000 after the longest streak of declines in 18 years, the Commerce Department reported March 17.

Source