By Yoshiaki Nohara and Ron Harui May 24 (Bloomberg) -- The dollar rose against higher- yielding currencies as political tension on the Korean peninsula boosted demand for safer assets. The dollar advanced to an eight-month high against the won after South Korea said it will halt trade with its northern neighbor and seek United Nations Security Council action over the sinking of a warship in March. The euro ended three days of gains amid concern Europe’s fiscal crisis will spread after the Bank of Spain took over a failing regional lender. “Geopolitical risk on the Korean peninsula appears to be mounting,” said Takashi Kudo, general manager of market information in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This will probably fuel risk aversion and buying of the yen and the dollar as ‘safe-haven’ currencies.” The dollar rose to $1.2513 per euro as of 7:15 a.m. in London from $1.2570 in New York on May 21. It strengthened 0.3 percent to 82.95 U.S. cents per Australian dollar and 0.6 percent to 67.47 cents per New Zealand dollar. The yen traded at 112.93 per euro from 113.13 last week. It gained 0.3 percent to 60.85 per New Zealand’s dollar. Japan’s currency was at 90.22 per U.S. dollar from 90.00. North, South Koreas North Korean shipping will be banned from the south’s waters, President Lee Myung Bak said in Seoul today. “If our territorial waters, airspace or territory are violated, we will immediately exercise our right of self- defense,” Lee said. North Korea last week threatened “all-out war” against any move to punish it, including any more UN sanctions. U.S. President Barack Obama offered “unequivocal” support for South Korea’s defense after North Korea’s deadly attack on one of its ships, and directed his government to review all polices regarding Kim Jong Il’s regime. A multilateral panel last week concluded that a North Korean submarine sank the 1,200-ton Cheonan warship, killing 46 sailors. The won fell to 1,214.65 per dollar from 1,194.40 on May 20, after earlier reaching 1,220.75, the weakest since Sept. 15, according to Seoul Money Brokerage Services. South Korea’s markets were closed on May 21 for a public holiday. The euro weakened versus 14 of its 16 major counterparts after the Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property loan defaults. The lender, based in the city of Cordoba, Spain, and controlled by the Roman Catholic Church, will be run by the government’s bank restructuring fund, the regulator said. ‘Revive Concerns’ “Weekend revelations that the Bank of Spain has acted to support a regional lender is likely to weigh on the euro,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a research note. “This will probably revive concerns about the broader stability of the euro-zone banking system.” Europe’s currency has lost 6.1 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar has risen 9 percent, and the yen has advanced 13 percent. The fastest convergence in short-term interest rates in almost a year is making the euro an addition to currencies used to finance investments in higher-yielding assets. “The hot guys are moving into using the euro as a funding currency,” said John Taylor, who helps oversee $7.5 billion as chairman of New York-based FX Concepts LLC, manager of the world’s largest foreign-exchange hedge fund. “It’s not quite as cheap as the yen but it’s a lot safer in a crisis, because the worse the world looks the worse the euro looks.” Borrowing in Euros Borrowing in euros to finance an investment in the Australian dollar, New Zealand dollar, Brazilian real and Norwegian krone returned 10 percent in the past 6 months, according to data compiled by Bloomberg. The same trade using the dollar instead of the 16-nation currency resulted in a 7.5 percent loss, and a 7.4 percent decline with the yen. The Dollar Index rose for the first time in four days before U.S. reports forecast to show the housing market is improving and consumers turned the most optimistic in 20 months. U.S. existing home sales rose to an annual rate of 5.65 million in April, from 5.35 million in March, according to a Bloomberg survey before the National Association of Realtors report today. The Conference Board’s confidence index climbed to 59 this month from 57.9 in April, according to another survey before tomorrow’s data. That would be the highest since September 2008. “The U.S. is experiencing a V-shaped recovery,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “Against this backdrop, the greenback is likely to be supported.” The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 0.4 percent to 85.721. To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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