BLBG: Dollar Falls as Lower Volatility, Libor Erode Safety Demand
The dollar declined to the lowest level versus the euro since January as falling currency and stock volatility spurred speculation investors will seek higher- yielding assets.
The U.S. currency’s decline accelerated after weakening beyond the level where it traded in March after the Federal Reserve announced its plan to buy up to $300 billion in Treasuries. New Zealand’s and Canada’s dollars gained versus the U.S. currency as crude oil prices rose above $60 a barrel, encouraging demand for currencies of commodity producers.
“The broad dollar weakness is at play,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “Things are normalizing.”
The euro advanced 1.2 percent to $1.3788 at 10:04 a.m. in New York, from $1.3630 yesterday. It earlier touched $1.3795, the highest level since Jan. 8. The yen appreciated 0.6 percent to 95.37 per dollar from 95.97. The euro increased 0.5 percent to 131.51 yen from 130.81.
The Dollar Index, used by Intercontinental Exchange Inc. to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped as much as 1.1 percent to 81.181, the lowest level since Jan. 2, on reduced demand for safety.
The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced an asset-purchase plan to further stimulate the economy with interest rates dropping to near zero, a measure known as quantitative easing.
Currency Volatility
Implied volatility on major currencies, which reflects investors’ expectations of currency swings, fell to 13.77 percent, from 13.83 yesterday, according to data compiled by JPMorgan Chase & Co. The gauge was at 17.22 percent at the end of March. A drop in volatility tends to signal reduced demand for options to protect investors from wild currency swings.
“We’ve seen in recent days that euro-dollar is still being driven by risk aversion,” said Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second- biggest lender. “It’s of course calming for many investors when volatility falls.”
The VIX, as the Chicago Board Options Exchange Volatility Index is known, and Europe’s VStoxx Index have both retreated to their lowest levels since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history. The Standard & Poor’s 500 Index added 0.3 percent.
The London interbank offered rate, or Libor, for three- month dollar loans decreased 0.04 percentage point to 0.72 percent, bringing its drop over the past four days to almost 0.14 percentage point, according to the British Bankers’ Association. The rate was 1.43 percent at the end of 2008.
Canada’s Dollar
Canada’s dollar advanced as much as 0.7 percent to C$1.1478 per U.S. dollar, near the strongest level since November, as crude oil for July delivery rose as much as 2.5 percent to $61.15 a barrel on the New York Mercantile Exchange. Raw materials such as crude oil and gold make up more than half of Canada’s export revenue.
The New Zealand dollar rose 0.6 percent to 60.55 U.S. cents, extending this month’s gain to 7.5 percent. The Australian dollar increased 0.2 percent to 77.60 U.S. cents, near the strongest level since October.
Sterling advanced as much as 0.4 percent to $1.5536, the highest level since Dec. 18, as lower Libor rates signaled credit markets are thawing.
The pound may climb to $1.5750 if it rises through the 200- day moving average versus the U.S. currency of $1.5554, Sue Trinh, a senior currency strategist at Royal Bank of Canada in Sydney, wrote in a report today.
