BLBG: Dollar Rises From 7-Week Low as Retail Drop Spurs Safety Demand
The dollar rose from a seven-week low versus the euro after an unexpected drop in U.S. retail sales spurred demand for the greenback as a haven.
The euro declined for a third day versus the yen after Marko Kranjec, a European Central Bank council member, said the bank is likely to increase its asset-purchase program and may broaden the scope beyond covered bonds. The pound declined versus the euro and dollar after the Bank of England predicted a protracted recovery.
“It’s certainly a reality check for sure,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “All the news favors the dollar bulls.”
The dollar advanced 0.3 percent to $1.3608 per euro at 10:45 a.m. in New York, from $1.3648 yesterday. It earlier slid to $1.3722, the weakest level since March 23. The yen strengthened 0.2 percent to 96.23 against the dollar from 96.45. The yen appreciated 0.5 percent to 131.01 per euro from 131.63.
New Zealand’s dollar and Norway’s krone were among the biggest losers versus the greenback as the drop in U.S. retail encouraged investors to reduce holdings of higher-yielding assets. The kiwi, as New Zealand’s currency is known, lost 1.9 percent to 59.44 U.S. cents, while the krone fell 1.4 percent to 6.5380 versus the dollar. Over the past two months, the currencies gained 13 percent and 5 percent, respectively.
U.S. retail sales decreased 0.4 percent last month after dropping a revised 1.3 percent in March, the Commerce Department reported in Washington. The median forecast of 68 economists surveyed by Bloomberg was for no change.
Yen’s Gain
The yen climbed today against all of the 16 most actively traded currencies tracked by Bloomberg as an increase in volatility damped demand for the carry trade. Japan’s currency gained 1.8 percent to 11.23 against the South African rand, extending its 5-day advance to 5 percent, and rose 1.4 percent to 7.19 versus the Mexican peso for an appreciation of 3.9 percent since May 6.
The JPMorgan Chase & Co. index of investor expectations for currency swings, known as implied volatility, rose to 14.41 percent from 13.38 percent at the end of last week.
In the carry trade, investors get funds in a country with low borrowing costs and buy assets where interest rates are higher. The risk is that currency fluctuations can wipe out gains. Japan’s target lending rate of 0.1 percent compares with 8.5 percent in South Africa and 6 percent in Mexico.
Japan’s Carry Trade
Japanese businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against higher-yielding currencies, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen short positions, RBC Capital Markets strategists said. A short is a bet that a currency or security will fall.
Investors should buy the yen against the dollar as risk aversion returns in coming months, prompting traders to sell less of the Japanese currency to purchase higher-yielding assets, according to Deutsche Bank AG.
The yen may strengthen 6.3 percent to 90 per dollar “over the summer,” Bilal Hafeez, the London-based global head of currency strategy, wrote in a note sent to Bloomberg today.
“The probability of a bout of risk aversion is high over the coming months, and the yen would benefit most,” Hafeez wrote.
The pound weakened 0.7 percent to 89.99 pence per euro and dropped 0.9 percent to $1.5127 as the Bank of England’s forecasts published today in London indicated the U.K.’s gross domestic product will contract on an annual basis for the rest of this year before growth resumes in 2010. Inflation will slow to as low as 0.4 percent this year, the central bank added.
‘Protracted Recovery’
“The risks are weighted toward a relatively slow and protracted recovery,” BOE Governor Mervyn King said in London today. There are “pretty solid reasons” to question whether a recovery can be sustained and “inflation is more likely to be below the target than above,” he added.
King’s comments were made even as confidence in the global economy rose to the highest level in 19 months as central bankers pointed to signs of a recovery and stress tests on U.S. banks reassured investors, a Bloomberg survey of users showed.
The Bloomberg Professional Global Confidence Index climbed to 38.72 in May from 21.20 last month, the biggest increase since the survey began in November 2007. Because the number is below 50, it means pessimists still outnumber optimists.
Direction of Yen
Users in Japan remain evenly divided on the yen’s direction against the dollar, while those in Western Europe aren’t as optimistic that the euro will gain against its U.S. counterpart.
The ECB’s Kranjec, who heads Slovenia’s central bank, said in an interview in Ljubljana today that “we don’t exclude” the purchase of first-class corporate bonds and short-term securities such as commercial paper in the central bank’s asset- purchase program. Asked whether the ECB will spend more than 60 billion euros ($82 billion), Kranjec said: “Very likely,” adding “this is not the final amount.”
President Jean-Claude Trichet last week stepped up the ECB’s response to the worst recession since World War II, cutting the benchmark interest rate to a record low of 1 percent and announcing the bank will buy covered bonds.
