BLBG: Dollar Advances as Jobless Claims Rise, Spurring Safety Demand
The dollar strengthened against the euro for a second day as a report showing U.S. jobless claims rose last week more than economists forecast and a drop in stocks spurred demand for a refuge.
The U.S. currency rose against the South Korean won and South African rand as the MSCI Emerging Markets Index had its biggest decline in more than two weeks, damping 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 in London at Deutsche Bank AG. “My view is that the worst is behind us, but it’s all about sentiment. It won’t take much more than a few pieces of weak data to convince some investors to take refuge in safe-haven assets.”
The dollar advanced 0.3 percent to $1.3557 per euro at 8:58 a.m. in New York, from $1.36 yesterday, after appreciating earlier to $1.3526, the strongest level since May 8. The U.S. currency increased 0.3 percent to 95.54 yen from 95.30. The euro was at 129.63 yen, compared with 129.61.
The won slumped 1.8 percent to 1,266.90 versus the dollar and the South African rand declined 0.7 percent to 8.5962 against the dollar as the MSCI Emerging Markets Index declined 2.2 percent, the steepest retreat since April 27.
Dollar Index
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 82.73.
The MSCI Asia-Pacific Index of regional shares slipped 3 percent, its biggest drop since March 30, and Europe’s Dow Jones Stoxx 600 Index fell 0.5 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 expects to report a second straight full-year loss.
Initial U.S. jobless claims increased to 637,000 in the seven days ended May 9 from 605,000 a week earlier, the Labor Department reported today. The median forecast of 38 economists surveyed by Bloomberg was for an increase to 610,000.
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.
Weber’s Stance
Axel Weber, a council member who heads Germany’s Bundesbank, countered in London that the ECB won’t increase such spending and cautioned against too much monetary-policy stimulus.
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 yen weakened earlier against the dollar 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.
Yen as Refuge
The yen may reverse this year’s decline against the dollar and pound as Japan’s currency takes over from the greenback as the best refuge from the financial crisis, according to TD Securities Ltd.
Investors may benefit by adding to bets against the dollar, with the U.S. currency expected to drop to 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,” they added. Nouriel Roubini, the New York University economics professor who predicted the current financial crisis, said the dollar’s role as the world’s main 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.
The dollar and the yen may beat other currencies, according to UBS.
“We view the dollar and the yen as relative outperformers from a cyclical perspective,” Gareth Berry, an analyst at the bank in Zurich, wrote today in a report. “Structural forces will continue to keep dollar-yen under pressure.”
