Euro Strengthens Versus the Dollar Amid U.S. Slowdown Concern
July 29, 2010, 7:18 AM EDTBy Keith Jenkins and Yoshiaki Nohara
July 29 (Bloomberg) -- The euro rose to its highest level since the region’s $1 trillion bailout was announced on May 10 as concern the U.S. recovery is slowing while Europe accelerates spurred demand for the 16-nation currency.
The euro also strengthened versus the yen as a report showed European confidence in the economic outlook rose to the highest in more than two years in July. The single currency has been pushed higher this week as stress tests released July 23 found only seven European banks needed to raise capital. Economists say data released tomorrow will show slowing U.S. gross domestic product growth.
“The U.S. economy appears to be losing momentum, and that’s supporting the euro,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Conditions following the stress tests have become more supportive for risk assets. That’s detrimental for safe-haven currencies.”
The euro climbed 0.7 percent to $1.3085 at 6:51 a.m. in New York. It reached a two-and-a-half-month high of $1.3088. The single currency traded at 113.68 yen, erasing an earlier drop. The yen strengthened 0.6 percent to 86.91 against the dollar.
New Zealand’s dollar fell for a third day after the central bank said deteriorating growth will slow the pace of future interest-rate increases. South Korea’s won dropped for a second day on concern exports will falter and the central bank may intervene to prevent gains in the currency.
Confidence Report
U.S. economic growth slowed to an annual 2.5 percent pace last quarter, from 2.7 percent the previous three months, according to a Bloomberg survey before tomorrow’s Commerce Department report.
“Sentiment is beginning to build that the U.S. economy is slowing as stimulus measures are being removed,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “The U.S. is in a precarious position, fiscally speaking. There’s a steady drip of negative news that’s pushing people away from the dollar.”
The euro has strengthened 2.7 percent this month against its developed-world counterparts, according to Bloomberg Correlation-Weighted Currency Indices. It has dropped 7.6 percent this year. The dollar has gained 2.1 percent this year, and the yen has advanced 10 percent, the biggest gainer in the group, the indices show.
Kiwi Falls
The yen typically strengthens in times of financial turmoil. Japan’s trade surplus makes the currency attractive as it means the nation doesn’t have to rely on overseas lenders.
New Zealand’s dollar fell against 12 of the 16 other major currencies. Central bank Governor Alan Bollard raised borrowing costs for a second month and said the “pace and extent” of future increases would be more moderate than earlier projected.
“The statement is more dovish than in June and the market largely expected it to be unchanged,” said Imre Speizer, a market strategist in Wellington at Westpac Banking Corp., Australia’s second-largest lender. “The kiwi dollar is being sold on that. We’re likely to see further hikes in the next few meetings before consideration of a pause.”
The currency’s recent gains are “inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices,” Bollard said today in Wellington after increasing rates.
New Zealand posted a trade surplus of NZ$276 million ($200 million) for June, Statistics New Zealand said today, less than the NZ$368 million forecast in a Bloomberg survey.
Higher Yields
The benchmark rate of 3 percent in New Zealand compares to 4.5 percent for Australia and levels of 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets.
New Zealand’s dollar traded at 72.85 U.S. cents from 72.73 cents yesterday, after falling as much as 1 percent to 72.02 cents and dropped 0.3 percent to 63.43 yen.
The Korean won slipped 0.2 percent to 1,186.50 per dollar. It rose to a five-week high of 1,181.33 on July 27 before retreating yesterday as traders said the central bank bought dollars to counter the won’s appreciation. The Bank of Korea said an index measuring manufacturers’ expectations fell to 102 for August from 104 for July.
“Concern the recovery is slowing is bringing risk aversion back,” said Seo Jeong Hun, chief economist at Korea Exchange Bank in Seoul. “The possibility of intervention also exists, but exporters may try to repatriate income so won declines should be limited.”
--With assistance from Candice Zachariahs in Sydney and Frances Yoon in Seoul. Editors: Keith Campbell, David Clarke.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
