BLBG: Dollar Advances as Global Optimism Wanes, Asian Stocks Decline
The dollar strengthened for a second day against the euro as Asian stocks extended a global slump, spurring demand for the relative safety of the U.S. currency.
The euro declined to the lowest level in almost a week against the dollar on speculation European Central Bank officials will today signal they plan to take further unconventional measures to keep down borrowing costs. Asian currencies weakened, led by the South Korean won, on concern a U.S. jobs report today will show the global economy continues to deteriorate, damping the appetite for emerging-market assets.
“Riskier investments are being unwound, as reflected by the declines in Asian equities,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “Against that backdrop, the yen is likely to strengthen beyond 95 per dollar while the greenback will probably be bought versus other major currencies.”
The dollar advanced to $1.3568 per euro as of 6:25 a.m. in London from $1.3600 yesterday in New York. The U.S. currency earlier rose to $1.3526, the strongest since May 8. The dollar climbed to 95.52 yen from 95.30. The yen traded at 129.60 per euro from 129.61, after earlier climbing to 128.87, the highest level since April 29.
The won slumped 2.1 percent to 1,269.70 per dollar and the Malaysian ringgit declined 0.6 percent to 3.5525. The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose for a second day, gaining 0.2 percent to 82.658.
Stocks Decline
The MSCI Asia-Pacific Index of regional shares slipped 2.9 percent, heading for its biggest drop since March 30, and the Nikkei 225 Stock Average fell 2.4 percent. Sony Corp., which gets a quarter of its sales from the U.S., dropped 7 percent on concern a stronger yen will damp export earnings.
The dollar and the yen gained versus higher-yielding currencies yesterday after the U.S. Commerce Department said retail sales unexpectedly fell 0.4 percent in April. Economists forecast no change, according to a Bloomberg News survey.
“Recent economic data are disappointing investors hoping for a rapid and robust global recovery,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Any faltering in risk appetite should help support ‘safe- haven’ currencies like the dollar and the yen.”
Initial U.S. jobless claims rose to 610,000 in the seven days ended May 9 from 601,000 a week earlier, according to a Bloomberg News survey before the Labor Department report today.
Options
The yen weakened against the dollar for the first time in five days because of selling to protect options that would become worthless should Japan’s currency rise further, according to Shinichi Hayashi, a foreign-exchange dealer at Shinkin Central Bank Ltd.
“There’s going to be defensive selling of yen as it comes closer to 95 yen where pre-set option orders are placed,” Tokyo-based Hayashi said.
Options grant the holder the right to buy or sell a currency at a set price on a fixed date. An option ceases to exist should the underlying currency rise or fall to a knock-out trigger. Traders use knock-outs to reduce the premium paid for option contracts.
Lower Volatility
Implied volatility on one-month dollar-yen options was little changed from yesterday at 14.88 percent. Lower volatility would suggest a lower risk of exchange-rate fluctuations that can erode profit on so-called carry trades.
In carry trades, investors get funds in a nation with relatively low borrowing costs and invest in one with higher interest rates. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia.
The euro extended losses after falling from a seven-week high versus the dollar yesterday when ECB council member Marko Kranjec said in an interview in Ljubljana 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.
“The markets have begun to think there’s a possibility the ECB may commit to non-traditional steps,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. “The euro is likely to be top-heavy.”
ECB Vice President Lucas Papademos will speak at 10 a.m. in Vienna, Executive Board member Jose Manuel Gonzalez-Paramo will speak at 5:30 p.m. in Sevilla, Spain, and Executive Board member Juergen Stark will speak at 6:20 p.m. in Berlin.
Rate Cut
European policy makers cut the benchmark interest rate to a record low of 1 percent on May 7 and announced a plan to buy 60 billion euros ($82 billion) in covered bonds to loosen the credit market.
The ECB won’t spend more than that level, said Axel Weber, a council member who heads Germany’s Bundesbank, in a speech in London yesterday. Weber cautioned against too much monetary- policy stimulus.
The yen may reverse this year’s decline against the dollar and the pound as Japan’s currency takes over from the greenback as the best refuge from the global financial crisis, TD Securities said.
Investors may benefit by adding to bets against the dollar, with the U.S. currency expected to reach 92 yen by year-end, wrote analysts led by Stephen Koukoulas, head of global foreign exchange and fixed income at TD Securities in London. TD also recommended selling the pound against the yen, targeting a slide in the British currency to 139 yen.
“The U.S. dollar’s cozy relationship with risk aversion is at risk itself,” the analysts wrote. The yen “has a chance at establishing its credentials as the refuge of choice in time of market uncertainty.”
