BLBG: Dollar Drops; China Optimism Spurs Higher-Yielding Asset Demand
The dollar fell to an eight-month low versus the Australian currency and dropped against the Norwegian krone after a report showed China’s economy may be recovering, sparking demand for commodities and higher-yielding assets.
The Russian ruble rose to its strongest level since January as manufacturing in China expanded for a third month. The dollar weakened to a five-month low against the euro and declined to the weakest level since October against the pound as stocks and commodities advanced. Reports showed U.S. manufacturing contracted at the slowest pace in eight months and construction spending unexpectedly increased.
“The fortune of the dollar is tied to the ebbs and flows of risk appetite,” said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon Corp., the world’s largest custodial bank with over $20 trillion in assets under administration. “Commodity currencies are the best place to be, given the signs of the global economic recovery.”
The dollar depreciated 0.3 percent to $1.4195 per euro as of 10:18 a.m. in New York, from $1.4158 on May 29. It earlier touched $1.4246, the weakest level since Dec. 29. The greenback slid 1.3 percent to $1.6408 per pound, after earlier breaching $1.64 for the first time since Oct. 31.
The Japanese yen weakened against all of the 16 most actively traded currencies, dropping to the lowest levels since October against the Australian and New Zealand dollars. The U.S. dollar strengthened 1 percent to 965.32 yen, from 95.34 yen at the end of last week.
Currencies of commodity producers led the rally against the dollar after crude oil advanced as much as 3 percent to $68.29 a barrel.
Commodity Currencies
Norway’s krone appreciated 1.4 percent versus the dollar to 6.2 krone, and touched 6.1798, the strongest level since Oct. 14. The Australian dollar reached 81.38 U.S. cents, the strongest since September. Russia’s currency rose 0.5 percent to 30.81 rubles per dollar, the strongest since Jan. 9. Crude oil is the largest exports in Norway and Russia. Raw materials, such as iron ore, account for more than half of Australia’s exports.
The Dollar Index declined to the lowest level this year as the U.S. government said it will own a majority of General Motors Corp. after the carmaker filed for bankruptcy, heightening concern about record debt sales to fund bailout packages and economic stimulus programs. The index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell 0.7 percent to 78.793.
Capital Flows
“When you see what’s going on in GM and the significant government ownership it’s going to result, that does discourage private capital coming into the U.S.,” said Robert Sinche, an independent strategist and former head of strategy for global rates, currencies and commodities at Bank of America Corp., in an interview on Bloomberg Radio in New York. “It’s hard to find any major source of capital that’s going to really commit to the U.S. and help support the dollar.”
The dollar will weaken to $1.45 “pretty easily,” said Sinche.
The yen touched 77.41 versus the Australian dollar and 62.03 against the New Zealand dollar, as investors resumed carry trades, in which they buy higher-yielding assets with funds borrowed in low-interest-rate countries.
The Japanese currency lost 15 of 16 major currencies in the past three months, losing at least 20 percent versus the Brazilian real, the Australian and New Zealand’s dollars, South African rand and the Korean won. Only the dollar did worse.
The Purchasing Manager’s Index for China fell to a seasonally adjusted 53.1 in May, from 53.5 in April, the Federation of Logistics and Purchasing said today in Beijing. A reading above 50 indicates expansion.
Equities Decline
The Standard & Poor’s 500 Index rose 2.5 percent. Stocks in Europe and Asia also advanced.
The dollar weakened to higher than $1.42 per euro for the first time since Dec. 30 after the Congressional Budget Office projected the U.S. deficit will quadruple to about $1.8 trillion.
“The trend is for a decline in the dollar on the deteriorating quality of U.S. government debt,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment-banking unit of Credit Agricole SA. “The market is very skeptical of the growing budget deficit.”
Treasury Secretary Timothy Geithner, visiting China this week, said the U.S. wants to reduce the budget gap as soon as an economic recovery takes hold. Geithner is in Beijing to persuade China, the biggest foreign holder of Treasuries, to keep buying the securities. The U.S. goal is a deficit of “roughly 3 percent” of gross domestic product, Geithner reaffirmed today in a speech at Peking University in Beijing.
Euro’s Advance
The euro fell against 13 of the 16 major currencies on speculation European policy makers meeting on June 4 will announce additional measures to spur growth in the region.
“There is the risk that the European Central Bank will expand its quantitative easing program,” which may be weighing on the euro, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.
ECB President Jean-Claude Trichet said last month the bank would buy 60 billion euros ($85 billion) of covered bonds. The Federal Reserve, the Bank of England and the Bank of Japan are already buying government and corporate bonds in a policy known as quantitative easing. The ECB will keep the main interest rate unchanged at 1 percent at the meeting, according to a Bloomberg survey of economists.
‘Down Substantilly’
The euro has advanced 12 percent versus the dollar in the past three months, sparking speculation the currency’s appreciation is sapping the earnings of exporters in the 16- country region and delaying its recovery.
The euro will “go back down substantially,” said Robert Mundell, the Columbia University professor who won the 1999 Nobel Prize in economics for research laying the foundation for the European currency’s birth that year.
“Increased confidence in the euro is by itself a good thing, but it is awkward for it to come about when the European economy is in a state of negative growth,” Mundell, 76, said by e-mail. “The higher euro will tend to tip the euro area into mild deflation, exacerbating the difficulties of debtors and the solvency of the banks, worsening Europe’s export markets and increasing its unemployment.”
