Bloomberg News

Dollar Rises From 11-Week Low as Budget Impasse Spurs Refuge Bid

July 27, 2011

July 27 (Bloomberg) -- The dollar advanced from the lowest level since May against the currencies of six major U.S. trading partners as an agreement to raise the debt limit remained elusive, spurring demand for a refuge.

The greenback rose for the first time in three days against the euro as Senate Majority Leader Harry Reid said it’s time Republicans “face facts” and agree on a compromise plan. The euro fell against the dollar and Swiss franc after Standard & Poor’s lowered Greece to CC, two steps above default. The Australian dollar rallied against all of its most-traded counterparts as consumer prices rose more than forecast.

“People are very nervous, and there is a lot of uncertainty,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “The dollar is benefiting in some regards from safe-haven.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies including the euro, yen and pound, rose 0.8 percent to 74.081 at 5 p.m. in New York, from 73.474 yesterday, after earlier touching 73.421, the lowest level since May 5.

Brazil’s real declined the most in more than a year after the government said it will levy a tax on some investments in foreign-exchange derivatives, the latest step in a bid to stem the currency’s rally.

Real Versus Dollar

The real declined 1.1 percent to 1.5556 per dollar, from 1.5391 yesterday. It earlier slid as much as 2 percent to 1.5704 in its biggest intraday decline since June 2010.

Brazil took further action to end a rally in the real after repeated efforts to weaken the currency this year failed to prevent it from reaching a 12-year high yesterday. The government authorized the monetary council to charge a 1 percent tax on certain derivatives operations and to raise taxes on futures operations.

The Australian dollar surged to a record against the greenback today after the Bureau of Statistics said consumer prices rose 0.9 percent in the second quarter. The median forecast of 25 economists in a Bloomberg News survey was for a 0.7 percent gain.

Swaps traders reduced bets on an interest-rate cut in Australia after the report, according to a Credit Suisse Group AG index.

The Aussie appreciated 0.6 percent to $1.1020 after reaching $1.1081, the highest level since the currency began trading freely in 1983.

Dollar Against Euro

The U.S. dollar gained 1 percent to $1.4369 against the euro, from $1.4511 yesterday, after touching $1.4536, the weakest level since July 5. The greenback gained 0.1 percent to 77.98 yen after touching 77.57, the lowest level since March 17. The euro dropped 0.9 percent to 112.04 yen.

President Barack Obama threatened a veto of House Speaker John Boehner’s two-step plan to raise the $14.3 trillion debt ceiling and cut $3 trillion in expenditure. A vote on the measure that had been scheduled for today was postponed until tomorrow. Treasury Secretary Timothy F. Geithner has said the U.S. will run out of options to prevent a default on Aug. 2.

“We’re coming down to the wire, but the reality is that some sort of a deal will get done,” said Kathy Lien, director of currency research at the online trader GFT Forex in New York. “At the end of the day, something will get done. It’s just a matter of the scope of the deficit-reduction plan.”

Fed’s Beige Book

The Federal Reserve said the economy grew at a slower pace in more parts of the nation since the beginning of June as shoppers restrained spending and factory production eased. Growth slowed in eight of the Fed’s 12 regions, compared with four in the last survey, the central bank said in its Beige Book survey released today.

The euro dropped 1 percent to 1.1516 Swiss francs, compared with the record low 1.1374 reached July 18, as S&P lowered Greece’s rating. The dollar traded at 80.17 Swiss centimes after falling to a record low 79.96.

Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, according to S&P. Its cut in Greece’s rating followed a downgrade by Moody’s Investors Service on July 25.

The euro fell earlier against the dollar after Germany’s Finance Minister Wolfgang Schaeuble said in a letter to lawmakers summarizing the results of the summit on July 21 that his country opposes a “blank check” for the euro-area rescue fund to purchase bonds on the secondary market.

Message to ‘Troops’

“You had Schaeuble sending a message to his troops saying the EFSF is not an automatic buyer of peripherals,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, referring to the European Financial Stability Facility. “There’s a natural tendency for people wanting to get rid of these positions anyway.”

Bank of Japan board member Hidetoshi Kamezaki said today he’s watching the yen’s recent gains with great caution as they could damage the economy. The BOJ will take needed policy action proactively, he said.

Group of Seven nations sold the yen on March 18 after it rose to a postwar record of 76.25 to the dollar on the previous day, saying in a statement they wanted to reduce “excess volatility and disorderly movements.”

--With assistance from Lukanyo Mnyanda in Edinburgh. Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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