The dollar strengthened against the South Korean won and South African rand as emerging-market stocks fell the most in almost seven weeks, spurring demand for the U.S. currency as a refuge. The dollar also rose against the yen and Taiwan dollar as the MSCI Asia-Pacific Index had its biggest decline in more than a month and concern a report will show U.S. jobless claims rose last week damped appetite for higher-yielding assets. The dollar and yen will remain “relative outperformers,” UBS AG, the world’s second-biggest currency trader, said in a report today. “Stock markets remain a key driver of currencies, and their decline is clearly reflected in the gain in the dollar,” said Henrik Gullberg, a foreign-exchange strategist at Deutsche Bank AG in London. “My view is that the worst is behind us, but it’s all about sentiment. It won’t take much more than a few weak data to convince some investors to take refuge in safe- haven assets.” The won slumped 1.8 percent to 1,266.90 per dollar as of 10:35 a.m. in London, and the South African rand declined 0.3 percent to 8.5423 per dollar. 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 0.1 percent to 82.568. Gains in the dollar may be tempered after Nouriel Roubini, the New York University economics professor who predicted the current financial crisis, said its role as a global reserve currency may be challenged. China’s yuan is likely to become a serious contender within a decade as the U.S. runs increased budget and trade deficits, Roubini wrote in the New York Times. Stocks Decline The dollar was little changed against the euro at $1.3593 after strengthening earlier to $1,3526, the highest level since May 8. The U.S. currency appreciated to 95.48 yen, from 95.30. The yen traded at 129.77 per euro from 129.61, after earlier reaching 128.87, its strongest level since April 29. The MSCI Asia-Pacific Index of regional shares slipped 3 percent, its biggest drop since March 30, and the Nikkei 225 Stock Average fell 2.6 percent. Sony Corp., which gets a quarter of its sales from the U.S., dropped 6.8 percent on concern a strengthening yen will damp export earnings. The company said today it expects to report a second straight full-year loss. The dollar and the yen gained versus higher-yielding currencies yesterday after the U.S. Commerce Department said retail sales unexpectedly fell in April. Economists forecast no change, according to a Bloomberg News survey. Jobless Claims “We view the dollar and the yen as relative outperformers from a cyclical perspective,” Gareth Berry, an analyst at UBS in Zurich, wrote today in a report. 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 reports the number today. 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. “One attractive feature of most non-standard measures used by the ECB is that they can be easily unwound,” ECB Vice President Lucas Papademos said in a speech in Vienna today. The timing of withdrawal “will clearly depend” on the inflation and economic outlook, he said. Non-Traditional Steps The euro fell from a seven-week high yesterday after ECB council member Marko Kranjec said in an interview in Ljubljana that “we don’t exclude” buying first-class corporate bonds and short-term securities in the central bank’s asset-purchase program. At the same time, Axel Weber, a council member who heads Germany’s Bundesbank, said in London that the ECB won’t increase such spending and cautioned against too much monetary- policy stimulus. “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 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. 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 markets. The euro fell as low as $1.2886 on April 22 on concern division among ECB members on the use of unconventional monetary tools might derail a recovery in the region. ECB Split “The split of opinion among ECB members may come into focus again when sentiment is bearish about the single currency and accelerate its decline,” said Takeshi Makita, an economist in Tokyo at Japan Research Institute Ltd., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest banking group. The yen weakened against the dollar earlier, its first decline 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. ‘Cozy Relationship’ Risk 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. 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.”

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