Bloomberg News

Dollar Weakens as Stocks Gain, Damping Demand for Safety Assets

October 05, 2011

Oct. 5 (Bloomberg) -- The dollar dropped against most of its major counterparts as stocks rallied, boosting demand for higher-yielding currencies as investors shunned the safety of the greenback.

The euro weakened earlier against the dollar and yen as speculation increased the European Central Bank may introduce policy measures to shore up the region’s economy. The pound declined against the dollar and euro after a report showed U.K. economic growth slowed during the second quarter. Currencies of countries linked to growth, such as Mexico’s peso and Brazil’s real, advanced after a report showed U.S. service industries expanded last month.

“There seems to be some more risk back on, although not that much,” said Greg Salvaggio, senior vice president of capital markets in Washington at the currency-trading firm Tempus Consulting Inc. “There’s some general optimism surfacing about the U.S. economy.”

The Dollar Index, a gauge of the greenback against six major currencies, dropped 0.2 percent to 78.938 at 5 p.m. in New York, from 79.063 yesterday.

The euro was little changed at $1.3348, from $1.3349. The dollar was little changed at 76.79 yen. Mexico’s peso rose 1.4 percent to 13.5538 per dollar and Brazil’s real added 1.4 percent to 1.8327 versus its U.S. counterpart.

The Standard & Poor’s 500 Index climbed 1.8 percent.

Economic Indicator

Riskier assets were boosted earlier after a report showed U.S. service industries expanded in September by more than forecast. The Institute for Supply Management’s non- manufacturing index fell to 53 from 53.3 in August, higher than the 52.8 forecast in a Bloomberg News survey.

“The ISM numbers are consistent with slow growth and not a recession in the U.S. and I think that’s the view that the market has been shifting to,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Some of the fears of renewed recession have eased over the past couple of weeks.”

The U.K. economy expanded 0.1 percent from the first quarter, lower than the 0.2 percent previously published, the Office for National Statistics said today in London. Consumer spending plunged 0.8 percent, the most since the first quarter of 2009. The slow growth is adding pressure on the central bank to keep interest rates low. The Bank of England meets tomorrow.

The pound dropped 0.2 percent to $1.5467.

Central Banks

Turkey’s and Russia’s central banks separately intervened in the currency market in an effort to prop up their currencies.

Turkey’s central bank sold $750 million of liras in a daily auction, its biggest such sale on record. The lira rose 1.1 percent to 1.8678 per dollar, after falling to a record low of 1.9096 yesterday.

Bank Rossii sold about $8 billion to shore up the ruble last month, the most since it arrested the currency’s devaluation in January 2009, Chairman Sergey Ignatiev said. The central bank intensified sales yesterday, selling $1.15 billion in the currency market, after the ruble plunged to the weakest level against the dollar in more than two years yesterday.

The ruble rose 0.5 percent to 32.5551 per dollar after touching 32.8935 yesterday, the weakest since August 2009.

Franc Falls

The Swiss franc dropped the most among the major currencies, falling 0.7 percent to 92.32 centimes per dollar and weakening 0.7 percent to 1.2321 per euro. The Swiss National Bank last month imposed a ceiling of 1.20 versus the euro to curb the franc’s appreciation.

Traders increased bets the ECB will lower borrowing costs tomorrow to fuel growth as the region’s debt crisis rattles markets. Eleven of 52 economists surveyed by Bloomberg predicted the central bank will cut its benchmark rate by at least a quarter-percentage point from the current rate of 1.5 percent. The others expect no change.

“The focus today, as it has been in recent days, is very much on figuring out how much investors want to square short risk and short euro positions going into the ECB,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York.

Moody’s Investors Service cut Italy’s rating three levels to A2 from Aa2, citing concern the government will struggle to reduce the region’s second-largest debt amid weak growth. Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years.

EU Moves

The Financial Times quoted European Union Economic and Monetary Commissioner Olli Rehn as saying there’s an “increasingly shared view” the region needs a coordinated approach to halt the debt crisis. He said today that there’s no concrete plan to recapitalize banks. Speculation about the effect of euro area bank holdings of Greek debt has helped weaken the euro 5.5 percent in the past month.

“We just need to know that there’s a bold policy response that European policy makers are willing to take to avert a meltdown,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “The euro has been whacked so much lately that any accommodative policy from the ECB is likely to bring down the risk premium and that might support the euro.”

The euro is down 4.1 percent during the past year among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen is up 9.6 percent and the dollar has added 0.6 percent.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Catarina Saraiva in New York at

To contact the editor responsible for this story: Dave Liedtka at

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