Bloomberg News

Dollar Gains as Factory Report Eases Fed Speculation; Real Drops

September 01, 2011

Sept. 1 (Bloomberg) -- The dollar rose to a two-week high versus the currencies of six major trade partners as stronger- than-forecast factory data damped bets the Federal Reserve may take further steps to stimulate growth, debasing the currency.

The greenback extended its gain versus the euro after the Institute for Supply Management’s manufacturing report prompted investors to curb speculation the Fed may introduce a third round of asset purchases, or quantitative easing. The franc gained against all of its 16 most-traded peers on signs European economies are slowing. Brazil’s real was the worst performer after the central bank unexpectedly cut interest rates.

“It signals that we’re not headed into a free-fall in terms of economic activity,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “The dollar has clearly got a boost out of it.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against peers that include the euro and yen, gained 0.6 percent to 74.553 at 5 p.m. in New York. It touched 74.714, the highest level since Aug. 12.

The franc climbed 2.1 percent to 1.1344 per euro and reached 1.1321, the strongest level since Aug. 23, from 1.1586 yesterday. The Swiss currency advanced 1.3 percent to 79.55 centimes per dollar, from 80.60. Europe’s 17-nation currency dropped 0.8 percent to $1.4259 and touched $1.4227, the lowest level since Aug. 15, in a third day of decline. The yen depreciated 0.4 percent to 76.93 per dollar.

Payrolls Report

The Dollar Index pared gains before a report tomorrow forecast to show U.S. payroll growth slowed. Employers added 68,000 jobs in August, versus 117,000 in July, according to the median estimate of economists in a Bloomberg survey.

Goldman Sachs Group Inc. economists cut their projection for job gains to 25,000, from a prior estimate of 50,000, citing the slow pace of hiring in late July and August.

The ISM factory index was at 50.6 last month, compared with 50.9 in July, the Tempe, Arizona-based group said today. Economists in a Bloomberg News survey projected the gauge would drop to 48.5 in its first contraction in two years. Readings greater than 50 signal expansion.

Fed Chairman Ben S. Bernanke said last week the central bank still has tools to stimulate a recovery that has been weaker than forecast, while sticking to his view that growth will pick up. He spoke at a conference in Jackson Hole, Wyoming. At last year’s event, he foreshadowed the Federal Open Market Committee’s second round of quantitative easing, the purchase of $600 billion of Treasuries from November through June.

“If the data comes out of this nature, where it’s OK, then I think it’s going to be hard to convince the majority of the FOMC to go along with QE3,” Nomura’s Nordvig said, referring to the ISM report.

Easing Fears

The Fed pledged at its Aug. 9 meeting to keep interest rates at a record low of zero to 0.25 percent until at least mid-2013. Policy makers meet next on Sept. 20.

The ISM reading “is a marginal decrease from July, but certainly the fact that the index stayed in expansion territory should help ease some of the fears of a renewed downturn in the U.S. economy,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There’s a number of negative stories hitting the euro. The European manufacturing purchasing- manager indexes have been soft, so the dollar is doing better because of that.”

Biggest Loser

Brazil’s real was the biggest loser among major currencies after the nation’s central bank unexpectedly cut its benchmark interest rate to 12 percent from 12.5 percent, citing a “substantial deterioration” in the global economy. Policy makers had raised rates at each of previous five meetings, and all 62 analysts surveyed by Bloomberg projected no change in the rate at yesterday’s meeting.

The real dropped 1.9 percent to 1.6197 per dollar.

The euro fell versus the franc and dollar as a European manufacturing gauge based on a survey of purchasing managers fell to 49 in August from 50.4 in the prior month, London-based Markit Economics said today. It was the weakest level in two years. A reading below 50 indicates contraction.

Spanish bonds fell today as the nation sold 3.62 billion euros ($5.2 billion) of five-year securities. The Treasury had set a maximum target of 4 billion euros for the sale. Demand for the securities was 1.76 times the amount sold, down from 2.85 in July. The European Central Bank has been buying Spanish securities to limit debt turmoil, which forced Ireland, Greece and Portugal to seek rescues.

‘Ongoing Drama’

“It’s the ongoing drama of Europe, and that the Spanish auction was not particularly highly subscribed today,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “They’re kicking the can down the road; there’s no clear resolution to the issue.”

Gains in the franc came after the Swiss government pledged yesterday to spend 870 million francs ($1.1 billion) as part of an economic stimulus package to help counter the impact of the currency’s strength. Economy Minister Johann Schneider-Ammann said the nation would have to learn to live with a strong franc, eroding concern the government may intervene to weaken it.

The franc has gained the most this year against the currencies of nine other developed nations tracked by Bloomberg Correlation-Weighted Currency Indexes, rising 12 percent. The dollar has lost the most, falling 6.5 percent, while the euro has appreciated 0.4 percent.

--Editors: Greg Storey, Dave Liedtka

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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