BLBG: Dollar Weakens Against Yen, Euro as Stocks Reverse Decline
The dollar fell to its lowest level against the euro this year as stocks rallied and investor demand for the U.S. currency as a refuge waned.
The dollar also declined versus the yen as the MSCI World Index rose 0.4 percent and a spokesman for Russian President Dmitry Medvedev said emerging-market leaders may discuss the idea of a supranational currency. The euro weakened against the yen after Europe’s jobless rate jumped to the highest level in almost 10 years. The pound strengthened to $1.65 for the first time since October.
“There’s been a lot of talk out of Russia about a new global currency and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a London currency strategist at Deutsche Bank AG. “These latest comments are just adding to the general dollar weakness we’ve seen recently.”
The dollar depreciated to $1.4281 per euro as of 7:57 a.m. in New York, the lowest level since Dec. 29, from $1.4159 yesterday. It fell to 95.42 yen, from 96.59. The yen strengthened to 136.15 per euro, from 136.78 yesterday. The pound advanced to $1.65 for the first time since Oct. 30, before trading at $1.6489, from $1.6443.
Medvedev may discuss his proposal to create a new world currency when he meets his counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the presdident, told reporters by phone today. Medvedev first proposed seeking alternatives to the U.S. dollar as a reserve currency in March.
‘Reserve Manager Concern’
“Despite the more comforting words we’ve had from the Chinese to the U.S. overnight, it does seem that the world’s reserve managers are still concerned about exposure to the dollar,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA.
Treasury Secretary Timothy Geithner, on a visit to China, said there will be demand for the record amount of debt the U.S. is selling.
Geithner found a “very sophisticated understanding” among the Chinese of why the U.S. is running up budget deficits, he said, pledging to rein in borrowing later. China, which has sought guarantees on its U.S. Treasury investments, will be watching “very carefully,” the former Peoples Bank of China adviser Yu Yongding said.
Stock Indexes
The MCSI World Index of shares rebounded from a 0.3 percent decline today and futures on the Standard & Poor’s 500 Index of U.S. shares gained 0.3 percent.
The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped for a fourth day, losing 0.6 percent to 78.664. It dropped to 78.524 earlier, the lowest this year. The gauge has fallen 11 percent from its high this year in March.
The dollar is tracking changes in the London interbank offered rate, or Libor, after its relationship broke with 10- year Treasury yields, Goldman Sachs Group Inc. said in a research report yesterday.
“When comparing the performance of the trade-weighted dollar in the last few months with the evolution of the 12-month Libor rate, both appear to perfectly match each other,” Thomas Stolper, a global markets economist at Goldman Sachs in London, wrote in a report yesterday. The “normalization” of Libor means that it more closely reflects monetary policy, he said.
Treasury Issuance
The dollar stopped tracking 10-year yields because “supply factors due to the heavy issuance schedule of U.S. Treasuries may have distorted the term structure in a way that no longer reflected the likely path of monetary policy,” Stolper wrote.
The Dollar Index fell 8.4 percent since April 20, when it reached a one-month high. Libor for 12-month loans in dollars dropped 35 basis points, or 0.35 percentage point, to 1.59 percent in the period.
The euro fell versus the yen after Europe’s unemployment rate jumped to 9.2 percent in April, from 8.9 percent the previous month, more than the 9.1 percent predicted by the median estimate in a Bloomberg News survey of economists.
Signs that the 16-nation economy won’t recover from the recession any time soon will give the European Central Bank more cause to reduce the main refinancing rate when it meets in two days’ time, said Satoru Ogasawara at Credit Suisse Group AG.
“The anticipation of further easing by the ECB will increase,” said Ogasawara, a foreign-exchange analyst and economist in Tokyo at Credit Suisse Group, the largest Swiss bank by market value. “An expansion of measures such as buying corporate and government bonds would also lead to further weakness in the euro.”
No ‘New Arguments’
ECB President Jean-Claude Trichet said last month it would buy 60 billion euros of covered bonds. The Federal Reserve, Bank of England and Bank of Japan are already purchasing government and corporate bonds in a policy known as quantitative easing, which is intended to keep borrowing costs low. The ECB will keep its benchmark rate unchanged at 1 percent on June 4, according to a Bloomberg survey.
“This week’s ECB meeting is unlikely to bring new arguments to be bullish on the euro,” said Michael Klawitter, a currency strategist in Frankfurt at Commerzbank AG. “The discussion about quantitative easing will continue.”
The euro’s rally against the dollar may be entering its “last stage,” and investors would likely benefit from selling the 16-nation currency against the greenback, UBS AG said.
The euro is set to weaken toward $1.30, analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist at the world’s second-biggest foreign-exchange trader, wrote in a note to clients yesterday. The analysts reiterated forecasts for the euro to trade at $1.40 in one month’s time and weaken to $1.30 in three months.
Record Borrowing
“We remain positive on the U.S. dollar and think that the greenback is likely in its final stage of weakness,” the analysts wrote. “Equity and bond flows have the potential to surprise and could lend support to the dollar.”
The U.S. may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to Goldman Sachs Group Inc. The U.S. budget deficit is projected to reach a record $1.75 trillion for the same fiscal year, according to the Congressional Budget Office.
“Heightening concern over foreigners’ willingness to fund the huge U.S. budget deficit has knocked safe-haven demand for the U.S. dollar down significantly,” John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd., wrote in a research report.
