Bloomberg News

Dollar Falls as Economic Data, Spain Auction Crimp Haven Demand

December 15, 2011

Dec. 15 (Bloomberg) -- The dollar dropped against the majority of its most-traded counterparts as U.S. economic data showed a quickening recovery and European funding stress eased, damping demand for the safety of the U.S. currency.

The 17-nation euro rallied from an 11-month low against the dollar as Spain sold more than its maximum target at a debt auction and a report showed European manufacturing and service industries contracted less this month than economists forecast. The Swiss franc advanced after the central bank refrained from introducing additional measures to weaken the currency. The Brazilian real and the Australian dollar strengthened on improved demand for higher-returning assets.

“With the Spanish bond auction, yields are still high, but when you’re able to sell all the bonds that they wanted to, that’s a good sign,” said John Doyle, a strategist in Washington at currency-trading firm Tempus Consulting Inc. “We followed up with fairly decent numbers here in the U.S. and it has kept with the narrative of a slightly risk-on kind of day.”

The dollar fell 0.3 percent to $1.3016 per euro at 5 p.m. in New York, after falling as much as 0.5 percent. Yesterday it reached $1.2946, the strongest level since Jan. 11. The greenback fell 0.3 percent to 77.86 yen. The European currency was little changed at 101.34 yen.

Annual Changes

The dollar has gained 2.1 percent against nine developed- nation counterparts this year, according to Bloomberg Correlation-Weighted Indexes. The euro has dropped 0.6 percent and the yen strengthened 5.1 percent.

Brazil’s real strengthened 0.9 percent to 1.8799 per dollar and the Aussie gained as much as 0.8 percent to 99.89 U.S. cents.

The real’s gain came as the central bank said it will lend dollars to help exporters, adding to the supply of the U.S. currency. The central bank will hold an auction to sell dollars with an agreement to repurchase them at a later date.

The euro rallied after the currency’s 14-day relative strength index against the dollar fell to 29 yesterday, below the 30-level that some traders see as a sign a currency may be poised to reverse direction.

“We’re having a natural short-covering bounceback after three or four days of very severe selloffs,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. A short is a bet the price of an asset will fall. “We had a very significant calming in European credit markets and the U.S. data was pretty good, which is underpinning the risk sentiment.”

Taylor View

John Taylor, founder of the world’s largest currency hedge fund FX Concepts LLC, said the euro should be trading lower and there remains a “distinct possibility” it will drop to parity with the dollar. Repatriation of assets is what’s keeping the euro from weakening, Taylor said in a Bloomberg Television interview.

Spain sold 6.03 billion euros ($7.9 billion) of bonds today, compared with the maximum target of 3.5 billion euros the Treasury set for the auction. The yield on the security due in April 2021, which acts as the 10-year benchmark, was 5.545 percent, compared with 5.433 percent when it was last auctioned on Oct. 20. The nation also sold debt due in 2016 and 2020.

The euro also gained after London-based Markit Economics said its euro-area composite index based on a survey of purchasing managers in both services and manufacturing industries rose to 47.9 from 47 in November. Economists forecast a drop to 46.5, according to a Bloomberg News survey. A reading below 50 indicates contraction.

All of the 16 major currencies tracked by Bloomberg dropped against the dollar this week through yesterday, with the euro losing 3 percent.

Swiss Banks

The franc gained the most in eight weeks against the euro after Switzerland’s central bank left its limit on the currency unchanged, resisting pressure from exporters to further curb its strength as officials assess deflation risks.

The Swiss National Bank kept the franc’s minimum exchange rate at 1.20 per euro, in line with the forecasts of nine out of 13 economists in a Bloomberg News survey. The central bank also maintained its benchmark interest rate at zero.

The franc appreciated 1.1 percent to 1.2237 per euro, the biggest gain since Oct. 20. The currency rose 1.4 percent to 94.00 centimes per dollar.

China sold $14.2 billion of its Treasury holdings in October, according to Treasury Department data released today. While it remains the biggest foreign holder of U.S. debt, its $1.13 trillion stake is the smallest since July 2010.

“It really is a very, very troublesome development,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration. “This suggests that China may have changed its strategy of how it manages its foreign exchange reserves, specifically the reinvestment of foreign exchange proceeds from intervention in the market.”

Yuan Pricing

Trading in the yuan, a denomination of China’s currency, is limited to a band set daily by the People’s Bank of China. It’s allowed to move 0.5 percent on either side of that rate.

The Chinese currency dropped for a third day after the central bank set its daily fixing 0.04 percent weaker at 6.3421 per dollar.

The Treasury’s data are forecast to be revised in 2012. On Feb. 28 the Treasury revised earlier estimates, showing China’s Treasury investments in October 2010 were a record $1.18 trillion, 30 percent more than the initial estimate of $906.8 billion.

The Federal Reserve Bank of New York’s general economic index rose to 9.5, from 0.6 in November. Economists projected the gauge would rise to 3, based on the median of 55 forecasts in a Bloomberg News survey. A separate report showed that the number of applications for unemployment benefits dropped last week to 366,000, the lowest level in three years, showing the U.S. labor market is healing.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, dropped 0.3 percent to 80.314. Yesterday it touched 80.730, the highest since Jan. 12.

--With assistance from Keith Jenkins in London. Editors: Paul Cox, Kenneth Pringle

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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