Bloomberg News

Dollar Drops as Bets Euro Leaders Will Act Fuel Risk Demand

September 26, 2011

Sept. 26 (Bloomberg) -- The dollar dropped for the first time in four days against a basket of its biggest trading partners as speculation increased European leaders will do what is necessary to stem the region’s sovereign debt crisis.

The euro pared its drop from a decade low against the yen after an official said the European Central Bank may restart covered-bond purchases along with further measures to ease monetary conditions. Norway’s krone and Sweden’s krona rose against the dollar as demand for higher-yielding assets increased. The yen traded near a post-World War II high against the U.S. currency.

“We’re seeing a little bit of an improvement in risk confidence,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “As risk appetite turns even tenuously positive, that allows these stronger currencies like Norway and Sweden to outperform not only against the euro, but against the dollar.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of its six biggest trade partners, dropped 0.3 percent to 78.233 at 9:13 a.m. in New York, from 78.501 last week. The yen rose 0.3 percent to 76.37 per dollar, trading within 1 yen of the record 75.95 reached Aug. 19.

The euro fell 0.4 percent to 102.94 yen after declining to 101.94, the weakest level since June 2001. The shared currency was little changed at $1.3481 after sliding to $1.3363, the lowest since Jan. 18.

Risk Sentiment

Futures on the Standard & Poor’s 500 Index rose 1.2 percent, boosting demand for riskier assets.

Sweden’s krona was the best performer against the greenback among the major currencies. It added 1.1 percent to 6.8577 per dollar. The Norwegian krone rose 0.8 percent to 5.8015 per dollar.

“A risk-on sentiment and gains in stocks benefit the Swedish and Norwegian currencies which are still heavily equity- driven,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Some people argue that they have become haven currencies after the moves by Swiss authorities, but our view is that they are still very much related to stocks.”

South Korea’s won lost the most among its major counterparts as concerns about Europe’s crisis intensified and as traders said authorities scaled back intervention that slowed declines last week.

Won Declines

The won sank to near a one-year low, slumping 2.2 percent to 1,192.85 per dollar after losing 4.7 percent last week, according to data compiled by Bloomberg. The currency gained 1.1 percent in the final minutes of trading on Sept. 23 after the finance ministry and central bank said they were ready to intervene. It touched 1,196.13 that day, the weakest level since September 2010.

ECB policy makers are likely next week to debate restarting their covered-bond purchases, a euro-region central bank official said.

The reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, said the person, who spoke on condition of anonymity because the information is confidential. Interest-rate cuts are likely to be discussed, though they are not on the current agenda, the official said.

The ECB is under pressure to increase stimulus as Europe’s worsening debt crisis tightens conditions in money markets. The ECB purchased 60 billion euros ($80 billion) of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.

Crisis Address

“There needs to be a global coordinated plan put in place to address the debt crisis and the capitalization of banks to re-instill faith in the world’s financial system,” said Derek Halpenny, London-based European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. “Without that, Europe will keep coming up short.” The euro may weaken to as low as $1.25 by year-end, he said.

Greece on Sept. 21 became the latest country to authorize expanded powers for the European Financial Stability Facility agreed to in July. The countries yet to ratify are Austria, Cyprus, Estonia, Finland, Germany, Ireland, Malta, Netherlands, Portugal, Slovakia and Slovenia. German lawmakers will vote on changes to the facility on Sept. 29. The enhanced powers can only take effect when all 17 euro nations have ratified them.

Finance ministers and central bankers who held weekend talks in Washington, where the International Monetary Fund and World Bank had their annual meetings, urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default.

German Data

The euro was also boosted after Germany’s Ifo institute said its business climate index for Germany dropped to 107.5 from 108.7 in August. That’s less than the economist-forecast decline to 106.5, according to a Bloomberg survey.

For all the concern about sovereign default in Europe, the euro remains above its average since being created almost 12 years ago, a sign that foreign-exchange traders see little chance of a collapse as officials step up efforts to keep the debt crisis from expanding.

At last week’s close of $1.35, the euro is 12 percent stronger than its average of $1.2024 since January 1999. While strategists have cut their forecasts for appreciation, they still see it rising to $1.43 by the end of 2012, based on the median of 35 estimates in a Bloomberg survey.

--Editors: Paul Cox, 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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