By Matthew Brown and Yasuhiko Seki July 28 (Bloomberg) -- The dollar fell as stocks extended their longest rally since 2003 and investors sought higher- yielding assets on speculation the global economy is emerging from the recession. The Dollar Index dropped to its lowest level this year as the MSCI World Index rose for a 12th day. The Australian dollar gained for a third day against the U.S. currency after the Reserve Bank of Australia said the economy may rebound faster than forecast six months ago. The euro climbed to a seven-week high against the dollar after Deutsche Bank AG said second- quarter profit rose 68 percent, beating analysts’ estimates. “Riskier currencies are trying to break higher as stocks rally,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA, France’s largest bank. “Upside potential is limited as euro-dollar has been quite disappointing in recent weeks, given that we’ve had near-perfect conditions for a rally to develop.” The Dollar Index, which the ICE uses to track the dollar against currencies including the yen, pound and Swedish krona, fell to 78.315 today, the lowest level since Dec. 18. It was at 78.467 as of 10:03 a.m. in London, from 78.626 yesterday. The dollar weakened to $1.4271 per euro, from $1.4232, and traded at $1.4304 earlier, the lowest level since June 3. The U.S. currency fell 0.5 percent to 94.75 yen. The MSCI World Index of global shares rose 0.4 percent, capping its the longest winning streak since June 2003. The Dow Jones Stoxx 600 Index of European shares climbed 0.2 percent. Housing Report U.S. home prices probably fell at a slower pace in May, indicating that the American economy is recovering. The S&P/Case Shiller index of 20 major metropolitan areas, due for release today, will show property values fell 17.9 percent in May from a year earlier, according to a Bloomberg News survey of economists. The measure was down 18.1 percent in the 12 months ended April. The Australian dollar climbed after RBA Governor Glenn Stevens said it appears “that the downturn we are having may turn out not to be one of the more serious ones of the postwar era, in contrast to the experiences of so many other countries.” “We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago,” the Reserve Bank chief said in Sydney today. The Australian dollar added 1.1 percent to 83.17 U.S. cents, while the New Zealand dollar gained 0.9 percent to 66.28 U.S. cents. The Canadian dollar rose for an eighth day to 92.98 U.S. cents, from 92.49 cents. ‘Jammed on’ Stevens left the benchmark lending rate at 3 percent on July 7 for a third month amid signs the lowest borrowing costs in half a century and government spending helped the nation skirt a recession. The benchmark interest rate is 8.75 percent in Brazil and 0.25 percent in Sweden. Japan’s is 0.1 percent. The U.S. key rate is as low as zero. A pick-up in the 25-day rolling correlation between Aussie- dollar and the two-year swap rate differential “suggests further Australian dollar gains,” Steven Pearson, head of Group of 10 foreign-exchange strategy in London, wrote in a research report today. “With the risk appetite switch jammed on pressure on the dollar and the yen continues to mount,” Pearson wrote. Deutsche Bank Earnings The euro gained for a fourth day against the yen after Deutsche Bank, Germany’s largest lender, said in a statement net income rose to 1.09 billion euros ($1.55 billion), from 649 million euros a year earlier. The median estimate of 13 analysts surveyed by Bloomberg was for 944 millions euros. “The bank’s results were better than expected,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The latest upmove in the euro could be due to this.” Deutsche Bank’s Chief Executive Officer Josef Ackermann said the banking industry and financial markets stabilized in the quarter, propelling a fourfold gain in income from debt sales and an improvement in equity trading. Losses in the yen against the dollar were tempered on speculation Japanese exporters are taking advantage of the currency’s drop in the past week to repatriate earnings from overseas assets before the month-end. Japanese Exporters “Exporters are prone to buy the yen, given that the end of the month is near,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale, France’s third- largest bank. Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1. Adding to pressure on the dollar, China’s Assistant Finance Minister Zhu Guangyao said on the first day of bilateral talks with U.S. officials that his government remains “concerned” about the value of its U.S. assets. Zhu’s remarks come after repeated public assurances by Treasury Secretary Timothy Geithner that the U.S. is committed to reining in a record budget deficit once an economic recovery is secured. China is the biggest foreign investor in U.S. government debt, and any decline in demand could push up borrowing costs. “China has massive holdings of Treasuries, so it is obviously worried,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Any diversification away from the dollar could be gradual, and the greenback may weaken a bit.” To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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