Bloomberg News

Dollar Strengthens; Greece Concern Boosts Bids for Safer Assets

June 27, 2011

June 27 (Bloomberg) -- The dollar strengthened versus most of its major peers on demand for the world’s reserve currency before Greece’s parliament votes on austerity measures.

The greenback climbed against 10 of 16 major currencies tracked by Bloomberg. Greek lawmakers must approve a 78 billion- euro ($110 billion) austerity package to receive a loan payment and future financing. The pound gained versus most counterparts after a survey showed U.K. business owners expect activity to pick up. New Zealand’s dollar declined for a third day as data showed the nation’s trade surplus was narrower than forecast.

“People are taking off risk heading into the vote,” said Adam Cole, head of global currency strategy at Royal Bank of Canada Europe Ltd. in London. “What we’re seeing essentially is people covering short dollar positions ahead of what looks like could be quite a noisy week. It probably will get through, and if it does the euro will probably have a decent bounce, but it’s certainly not a clear cut call.”

The dollar advanced 0.4 percent to 80.78 yen at 10:14 a.m. in London after touching 80.89, the strongest level since June 16. The euro was little changed at $1.4191 after earlier sliding to $1.4103, the weakest since June 16. The common currency depreciated 0.4 percent to 114.62 yen.

Greece Budget Cuts

European Union leaders vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through budget cuts and asset sales. European finance chiefs will decide on July 3 whether Greece has met aid conditions.

The first session of the Greek parliament’s three-day debate on the austerity measures will begin today, with a vote expected on June 29. An implementation law, which provides technical details of how the five-year plan will be applied, is also due to be discussed and approved by a deadline of June 30.

“There’s further uncertainty for the euro,” said Alex Sinton, a senior dealer at ANZ National Bank Ltd. in Auckland, New Zealand. “This is yet another step in the very long journey that they’ve got to take.”

One-month implied volatility for the euro-dollar exchange rate rose for a third day to 13.78, up from 12.28 on June 22.

Billionaire investor George Soros said yesterday it’s “probably inevitable” that a mechanism will be needed to allow weaker euro-region economies to exit the single currency.

U.S. Houses

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, gained 0.2 percent to 75.826. The index advanced for a fourth day, the longest rising streak since January.

Reports on U.S. housing this week may show that purchases will pick up even as property values continue to drop. Pending home sales, or contract signings for existing homes, probably increased 2.5 percent in May after dropping 12 percent the prior month, economists forecast the National Association of Realtors will report on June 29.

The S&P/Case-Shiller index of home prices in 20 cities, due a day earlier, likely fell in April from March, the 10th straight monthly drop on a seasonally adjusted basis.

“I expect the U.S. economy to improve gradually,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-biggest financial group by market value. “The recent slowdown will be a soft patch, which is what the Fed expects.”

Fed Chairman Ben S. Bernanke said on June 22 the U.S. economic recovery is proceeding “somewhat more slowly” than policy makers had expected.

Sterling Gains

The pound strengthened against 13 of a basket of 16 currencies tracked by Bloomberg. The Lloyds TSB Business Barometer index for business activity in the next 12 months rose to 46 in June, the highest since May last year, while a Lloyds index for current economic optimism rose to 36 from 14.

Sterling was also supported on speculation the Bank of England may raise rates earlier than expected after the Bank for International Settlements said central banks need to start raising interest rates to control inflation.

The pound appreciated 0.2 percent to 88.76 pence per euro and advanced 0.3 percent against the yen to 128.73 yen. It slipped 0.1 percent versus the dollar to $1.5936.

New Zealand’s dollar fell 1.1 percent to 80.28 U.S. cents. It earlier touched 80.09 cents, the weakest since June 16. The currency declined 0.7 percent to 64.85 yen.

The nation’s trade surplus was NZ$605 million in May, the statistics office said in Wellington, compared with the median estimate in a Bloomberg News survey of economists for a NZ$1 billion surplus.

Kiwi, Won

“The kiwi has come off on the back of the lower-than- expected trade data,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “This whole sovereign-debt crisis will continue to linger for a while. In the commodity currency space, commodity prices are soft.”

The won dropped for a third day, losing 0.6 percent to 1,085.63 per dollar. It slid as low as 1,088.70, the weakest level since June 17. South Korean Finance Minister Bahk Jae Wan on June 24 urged contingency planning for potential external shocks to the economy.

“Concerns that Greece’s debt crisis may spread to other European nations, including Italy and Portugal, is keeping investors from emerging-market assets,” said Byeon Ji Young, a currency analyst at Woori Futures Co. in Seoul.

--With assistance from Yoshiaki Nohara in Tokyo, Candice Zachariahs in Sydney and Seyoon Kim in Seoul. Editors: Keith Campbell, Matthew Brown.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.


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