Bloomberg News

Dollar Strengthens, Euro Drops to Seven-Week Low on Debt Crisis

November 25, 2011

Nov. 25 (Bloomberg) -- The dollar climbed against most major peers, extending this week’s gains, as investors sought the safest assets on concern economies in the euro area will worsen as leaders struggle to halt the region’s debt crisis.

The euro dropped to a seven-week low against the greenback as Italy prepares to sell bills today after the country’s two- year yield soared to a 14-year high yesterday. Australia’s dollar was set for a fourth week of declines as Asian stocks fell after German Chancellor Angela Merkel’s rejection of joint euro bonds damped optimism about a potential remedy for the region’s woes. The dollar rose against the yen before a U.S. report next week forecast to show consumer confidence improved.

“Risk sentiment is still pretty poor as there doesn’t seem to be one clear solution that will be swift for Europe,” said Besa Deda, chief economist at St. George Bank Ltd. in Sydney. “The U.S. dollar would get some support in this environment particularly, as the euro is out of favor.”

The euro touched $1.3295, the lowest since Oct. 6, before trading at $1.3306 at 8:09 a.m. London time, from $1.3347 yesterday in New York. The 17-nation currency has dropped 1.6 percent against the greenback this week. The dollar rose 0.3 percent to 77.38 yen. It strengthened also 0.3 percent, to 92.23 centimes, against the Swiss franc. Japan’s currency was at 103 per euro from 102.92 yesterday, when it reached 102.71, the strongest since Oct. 10.

Italy will auction 8 billion euros ($10.7 billion) of bills today, after the country’s two-year yield yesterday to the highest since 1997.

Euro Bonds

Joint euro bonds would immediately lead to a convergence of interest rates in the region, Merkel said yesterday at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France.

“This would take us back to where we were before the crisis,” Merkel said.

The Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners rose to as high as 79.31, the most since Oct. 6, after Hungary and Portugal’s credit ratings were cut to below investment grade by Moody’s Investors Service and Fitch Ratings respectively.

Fitch lowered Portugal’s long-term rating to BB+ from BBB- with a negative outlook while Moody’s cut Hungary’s foreign- and local-currency bond ratings to Ba1 from Baa3 yesterday.

Household Sentiment

The dollar is prized in times of turmoil because of the liquidity provided through its status as the world’s largest reserve currency.

The U.S. currency is poised for its first five-day gain in three weeks against the yen before a Nov. 29 report from the New York-based Conference Board that is projected to show confidence improved in November. The household sentiment index probably rose to 44.4 after touching 39.8 in October, the lowest since March 2009, according to the median estimate of economists in a Bloomberg survey.

“Once the U.S. economy starts to improve, you’re going to see a bit of money trickle out of the yen and into the U.S. dollar,” said Cameron Peacock, a market analyst at IG Markets in Melbourne.

The currencies of Brazil, New Zealand and Australia have led declines against the dollar this month among major peers as investors judge that a slowdown in global growth will weaken the outlook for commodity-exporting nations.

Higher Yielding Currencies

A Dec. 1 report by the statistics bureau and the China Federation of Logistics and Purchasing will likely show manufacturing contracted in November for the first time since February 2009. The median estimate of economists polled by Bloomberg is for a reading of 49.8, from 50.4 the previous month, and below 50 which is the dividing line between expansion and contraction.

“There is some further downside risk in both equity markets and associated risk assets, such as the Aussie and kiwi,” said Thomas Averill, a director at the currency and interest-rate risk management company Rochford Capital in Sydney.

Australia’s dollar declined 0.3 percent to 97.09 U.S. cents and is poised for a 7.8 percent fall in November. New Zealand’s currency was little changed at 74.24 U.S. cents. Brazil’s real traded at 1.8980 per dollar and slid 9.6 percent this month, the biggest decline among the 16 major currencies.

More than $4 trillion has been erased from the value of equities worldwide this month as rising borrowing costs in the euro-area stoked concern the debt crisis will derail growth.

--Editors: Garfield Reynolds, Jonathan Annells

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

To contact the editor responsible for this story: Garfield Reynolds in Sydney at greynolds1@bloomber.net.


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