BS: Dollar Strengthens as Increase in Treasury Yields Fuels Demand
Nov. 20 (Bloomberg) -- The dollar rose against most of its major peers as U.S. Treasury yields made the biggest jump in almost a year, inciting demand for the U.S. currency.
The euro pared a five-day loss versus the greenback on bets that Ireland will get a bailout from its financial crisis, preventing contagion across the region’s debt markets. The yen fell for a third straight week against its U.S. counterpart, the longest losing streak this year. The U.S. economy grew at a 2.4 percent annual rate last quarter, data next week may show.
“Yields have been very, very helpful in lifting sentiment toward the dollar,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “Good economic data is going to boost the dollar, boost yields.”
The greenback gained against 10 of its 16 most-traded counterparts. IntercontinentalExchange Inc.’s Dollar Index, used to track the currency against those of six major U.S. trading partners including the euro and yen, rose for a second week in the first back-to-back weekly increase since August. It advanced 0.5 percent to 78.504 in New York.
The dollar climbed 1.2 percent to 83.55 yen yesterday, from 82.53 on Nov. 12, and reached 83.79 yen on Nov. 18, the highest level since Oct. 5. Its last three-week advance versus the Japanese currency ended on Jan. 1.
The greenback rose 0.1 percent to $1.3673 per euro, from $1.3691 on Nov. 12. It touched $1.3448 on Nov. 16, the strongest level in seven weeks. The euro gained 1.1 percent to 114.23 yen, from 113.02 last week.
U.S. Treasuries dropped, pushing yields up and making the securities more attractive to investors.
10-Year Yields
Yields on the benchmark 10-year note had the sharpest two- week increase in 11 months, 34 basis points, as investors and world leaders questioned the effectiveness of the Federal Reserve’s plan to buy $600 billion in U.S. debt through June to spur employment and avert deflation. A basis point is 0.01 percentage point. Ten-year yields reached 2.96 percent on Nov. 16, the highest level in three months.
“The surprising backup in U.S. yields is putting yen under pressure,” Calvin Tse, a currency strategist in London at Morgan Stanley, wrote in a research note on Nov. 18. “Dollar-yen has a very robust correlation with U.S. rates.”
Irish Finance Minister Brian Lenihan said Nov. 18 he would welcome the creation of “substantial contingency capital funding” for Ireland’s banks, fueling speculation the nation will accept a bailout. The nation had previously maintained it didn’t need a rescue.
‘Tens of Billions’
Officials of the European Union, International Monetary Fund and European Central Bank started studying Irish banks’ books on Nov. 18. Ireland’s central-bank governor, Patrick Honohan, said that day he expected the country to seek a package worth “tens of billions” of euros to help rescue financial firms battered by the country’s property slump.
“The Irish bailout looks imminent,” said John Doyle, a strategist in Washington at currency-trading firm Tempus Consulting Inc. “If it’s too small, markets might react negatively.”
Lenihan is due to publish details of a four-year, 15 billion-euro ($20 billion) plan to lower the budget deficit this month and his 2011 budget on Dec. 7.
The currencies of commodity-exporting countries including New Zealand, Mexico, Brazil and Australia rose against most of their major counterparts as prospects for Europe’s sovereign- debt turmoil to ease fueled investors’ appetite for risk.
Chinese Bank Reserves
Their gains were tempered after China ordered banks to set aside larger reserves for the fifth time this year, aiming to drain cash from the financial system to limit inflation. The reserve ratio will increase 50 basis points starting Nov. 29, the central bank said on its website. The goal is to step up liquidity management and “appropriately control” credit and loans, it said.
The dollar gained as a report this week showed Philadelphia-area manufacturing expanded. The Philadelphia Fed’s general economic index climbed to a reading of 22.5, more than four times the forecast in a Bloomberg News survey.
Other data showed U.S. consumer prices excluding food and fuel, a gauge favored by central bankers, increased 0.6 percent in October from a year earlier, the smallest gain in year-over- year data going back to 1958.
Fed Chairman Ben S. Bernanke defended the U.S. central bank’s quantitative-easing plan, which it announced Nov. 3 and began putting into effect with purchases last week. He said in a speech in Frankfurt the effort will aid the economy.
‘Significant Uncertainty’
The program prompted criticism in the U.S. and abroad. German Finance Minister Wolfgang Schaeuble suggested it’s designed to erode the value of the U.S. dollar, and the four top Republicans in Congress wrote Bernanke this week expressing concern that it “introduces significant uncertainty regarding the future strength of the dollar.”
Bernanke said yesterday in Frankfurt that the best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States.”
The Commerce Department will report next week that the U.S. economy expanded at a 2.4 percent annual rate in the third quarter, according to the median forecast in a Bloomberg News survey. The data, due Nov. 23, is a revision of an estimate in October that said gross domestic product rose 2 percent, versus 1.7 percent in the second quarter and 3.7 percent in the first.
--Editors: Greg Storey, Paul Cox
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
