Bloomberg News

Dollar Falls Amid Signs of Accord in Euro Zone, More 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 stocks gained after European leaders said they would support the union, increasing demand for higher-yielding assets.

The euro gained against the dollar and pared a drop that took it to 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. Sweden’s krona and Norway’s krone gained against the dollar. The yen traded at almost a post-World War II high against the U.S. currency.

“During the U.S. day and even the European day there was a lot of risk-on sentiment,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “It’s going to be a short-lived bounce unless we see a clear and decisive plan.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of its six biggest trade partners, dropped 0.7 percent to 77.980 at 5:02 p.m. in New York, from 78.501 last week. The yen rose 0.3 percent to 76.36 per dollar, trading within 1 yen of the post-World War II record 75.95 reached Aug. 19.

The euro was little changed at 103.38 yen after declining to 101.94, the weakest level since June 2001. The shared currency rose 0.2 percent to $1.3533 after sliding to $1.3363, the lowest since Jan. 18.

The Standard & Poor’s 500 Index rose 2.3 percent after losing 6.5 percent last week.

Sweden’s krona was the best performer against the greenback among the major currencies as investors sought higher-yielding assets. It added 1.9 percent to 6.8026 per dollar. The Norwegian krone rose 1.7 percent to 5.7521 per dollar.

Risk Appetite

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

Canada’s dollar reversed its drop to the weakest level in more than a year versus its U.S. counterpart. The Canadian currency was little changed at C$1.0254 per U.S. dollar. It earlier touched C$1.0386, the weakest since Sept. 9, 2010.

European Central Bank Governing Council member Ewald Nowotny said European leaders should consider an expansion of the European Financial Stability Facility.

“We are just now discussing an extension of this EFSF,” Nowotny said in a lecture at Harvard University in Cambridge, Massachusetts today. While this “might not be a trillion” euros, “it is clearly something more than it is now and I think this makes sense.”

Euro Maneuvers

The Netherlands and Finland have no plans to increase their commitments to the euro area’s bailout fund, the prime ministers of both nations said today. The comments were echoed in Germany, where Finance Ministry spokesman Martin Kotthaus said that the government sees no need to expand the European Financial Stability Facility beyond the 440 billion euros ($592 billion) agreed by euro-region leaders on July 21. Six nations have already approved the changes, which need to be ratified by all euro-member countries.

“You’ve got conflicting stories out of Europe on a bigger, more decisive bailout package,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “But then on the same token you’re getting pushback out of Germany. We’re caught between a rock and a hard place.”

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

Loans Policy

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.

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.

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.

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.

Euro History

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.

The Russian ruble dropped to the lowest level in more than two years against the dollar as President Dmitry Medvedev dismissed Finance Minister Alexei Kudrin after accusing him of “insubordination” for questioning the Russian leader’s spending policies.

The ruble fell 1 percent to 32.4040 per dollar and reached 32.5225, its weakest intraday level since August 2009.

Prime Minister Vladimir Putin said Sept. 24 he’ll swap roles with his protégé, Medvedev, by running again for Russia’s presidency in March. Kudrin, the longest-serving finance minister in the Group of Eight nations, said later he wouldn’t serve in a Medvedev government because he disagreed with his plans to increase military spending.

--With assistance from Garth Theunissen in London. Editors: Paul Cox, 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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