Dollar Falls to Lowest Versus Euro in 2009 as Stocks Rally

Dollar Falls to Lowest Versus Euro in 2009 as Stocks Rally


Sept. 8 (Bloomberg) -- The dollar dropped to the lowest level this year against the euro as prospects for economic recovery spurred a rally in global stocks, helping to push gold above $1,000 an ounce and oil to more than $71 a barrel.

The decline pushed the trade-weighted U.S. Dollar Index down by the most since July as the greenback became the cheapest funding currency in the London interbank lending market. The Brazilian real and South African rand rallied more than 25 percent this year as investors sought higher-yielding assets in emerging-market nations.

“You are seeing a reversal of flight to quality as investors start to put money into higher-yielding assets,” said Warren Naphtal, who oversees $915 million in currency assets as chief investment officer in Weston, Massachusetts, at P/E Investments, an asset-management company. “The U.S. dollar is a good source for cheap funding.”

The U.S. currency depreciated 1.1 percent to $1.4491 per euro at 4:09 p.m. in New York, from $1.4332 yesterday, after reaching $1.4535, the weakest since Dec. 18. The dollar dropped 0.9 percent to 92.22 yen, from 93.08. The euro advanced 0.2 percent to 133.71 yen, from 133.39.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the euro, yen, pound, franc, Canadian dollar and Swedish krona, fell as much as 1.2 percent to 77.047 today, the lowest level since Sept. 29. It was the biggest intraday drop since July 31. The index was down 14 percent from its high this year of 89.624.

JPMorgan Outlook

JPMorgan Chase & Co. said the gauge may decline to as low as 76, a level last seen on Sept. 23, 2008, eight days after Lehman Brothers Holdings Inc. declared bankruptcy. The gauge broke through a “support zone” between 77.40 and 77.45 today, wrote Niall O’Connor, a technical analyst in New York at JPMorgan Chase. The euro will probably rise to $1.4640 per dollar, he predicted. Support is where orders to buy a currency are clustered.

The krona advanced as much as 1.7 percent to 7.0100 per dollar in the biggest intraday gain since Aug. 21, while the Canadian currency reached a one-month high of C$1.0674.

The Swiss franc advanced as much as 1.6 percent to 1.0433 per dollar today, the strongest level since July 31, 2008, as the three-month London interbank offered dollar rate dropped below that of the franc for the first time since November, making the greenback the cheapest currency for investors to fund purchases of higher-yielding assets.

Falling Libor

Three-month dollar Libor fell to a record low of 0.30 percent today, compared with 0.31 for the franc, according to the British Bankers’ Association. The corresponding rate for funds in yen was 0.37 percent, increasing its advantage to the widest level since January 1993.

“The dollar is the predominant funding currency,” said Todd Elmer, currency strategist at Citigroup Inc. in New York. Elmer advises clients to buy the Canadian dollar versus the yen and the Norwegian krone against the franc to benefit from the improvement in “risk sentiment.”

The drop in the dollar today didn’t seem to deter investors from U.S. debt. Treasuries were little changed after a record $38 billion sale of three-year securities drew the strongest demand in almost a year in the first of this week’s three note and bond auctions totaling $70 billion.

Traders are betting on longer-term declines in the dollar after the U.S. budget gap reached $1 trillion. Forward contracts show the greenback weakening to $1.49 per euro in the next 10 years, compared with an average of $1.17 since the single European currency was introduced in 1999.

Trade Deficit

While the U.S. trade deficit has narrowed from $64.9 billion a year earlier, it has been little changed at around $27 billion since February, meaning the nation needs to attract about $1 billion a day in new foreign capital for the dollar to maintain its value.

“The U.S. has such a huge financing need that you wonder what level of the dollar that will require,” said Emanuele Ravano, a managing director in London at Pacific Investment Management Co., which oversees more than $840 billion.

The real gained 0.9 percent to 1.8270 versus the dollar today and the rand reached 7.5121, the strongest level in 13 months, on bets investors will increase trades in which they sell the currencies of countries with low borrowing costs and buy assets in developing nations where returns are higher. The U.S. target lending rate of zero to 0.25 percent compares with 8.75 percent in Brazil and 7 percent in South Africa.

Gain in Equities

The Standard & Poor’s 500 Index rose 0.9 percent, and the Dow Jones Stoxx 600 Index added 0.3 percent in a fourth day of gains. The MSCI World Index for global stocks gained 57 percent in the past six months.

None of the most-traded developed-market or emerging-market currencies tracked by Bloomberg declined against the dollar, which dropped 1 percent to 2,002.30 Colombian pesos and decreased 1.7 percent to 186.30 Hungarian forints.

The greenback’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the Geneva-based United Nations Conference on Trade and Development said yesterday in a report.

China, India, Brazil and Russia called this year for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II.

Advance in Pound

The pound rose 0.9 percent to $1.6496 after the Office for National Statistics in London said factory output increased 0.9 percent in July, compared with a 0.3 percent median forecast of 27 economists surveyed by Bloomberg News. Sterling depreciated 0.3 percent to 87.89 pence per euro.

The euro’s 3.4 percent gain against the pound in the past month may erode as Europe’s yield advantage against the U.K. narrows, wrote Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney, in a research report today.

The two-year German note yield was 0.14 percentage point above the rate of the comparable-maturity U.K. security today, narrowing from a seven-month high of 0.48 percentage point on Aug. 21.

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