The Decline of the Dollar Begins as Risk abates

us-dollar-down-the-drain

Dollar going down the drain – photo Boom2Bust.com

 

BLOOMBERG WIRE

 

By Ye Xie and Whitney Kisling

Feb. 3 (Bloomberg) — The dollar fell against most of the other major currencies as efforts to revive global economic growth reduced demand for the greenback as a haven.

The U.S. currency weakened beyond $1.30 per euro as the Federal Reserve extended its emergency-lending programs and foreign currency-swap lines by six months, easing demand for dollar funding. Australia’s dollar was the biggest gainer versus the greenback after the Reserve Bank cut the benchmark lending rate and the government said it will spend A$42 billion ($26.5 billion) to sustain the economy.

“The market is keen to put the risk trade back on,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “That helped the dollar underperform. Given that the scarcity of the dollar was a modest positive for the currency, the Fed measures suggest renewed pressure.”

The dollar declined 1.5 percent to $1.3038 per euro at 4:03 p.m. in New York, from $1.2843 yesterday, and reached $1.3058, the weakest level since Jan. 29. The dollar fell 0.2 percent to 89.24 yen from 89.45. The yen slid 1.3 percent to 116.34 per euro from 114.89 yesterday.

The U.S. currency depreciated 1.8 percent to 6.9053 Norwegian kroner and 1.6 percent to 1.1422 Swiss francs as the Fed said it was extending currency swaps with 13 other central banks through Oct. 30. The programs had been previously authorized through the end of April.

The premium for swapping floating-rate, euro-denominated payments for those in dollars fell today following the Fed’s announcement, signaling eased demand for dollar funding.

Cross-Currency Swap

The rate on a one-year cross-currency basis swap between euros and dollars was minus 53.4 basis points, compared with as much as minus 62.4 basis points yesterday, the largest premium for dollar funding since Dec. 18. A negative swap rate signals that investors are willing to receive reduced euro interest payments to obtain dollar-based financing. A basis point equals 0.01 percentage point.

The dollar rallied 15 percent versus the euro from September to October, partly as banks and companies sought the greenback to repay dollar debts after the collapse of Lehman Brothers Holdings Inc. seized up interbank lending.

The yen fell versus the euro for the first time in four days after the Bank of Japan said it will buy 1 trillion yen ($11.1 billion) of shares held by financial companies, increasing the money supply.

Bank of Japan

“The Bank of Japan’s purchases may also be aimed at staving off the exceedingly positive bias in the currency,” wrote Ashraf Laidi, the chief market strategist in London at CMC Markets Plc, in a note to clients.

Honda Motor Co. cut its full-year profit forecast by 57 percent last week as vehicle demand in the U.S. plunged and the yen gained 23 percent against the dollar in 2008, eroding the value of exports.

The Aussie rose 3.2 percent to 65.19 U.S. cents as Treasurer Wayne Swan announced stimulus spending including A$12.7 billion in grants to families and low-income earners and A$28.8 billion for infrastructure. The Reserve Bank of Australia cut the overnight cash rate target by 1 percentage point to a 45-year low of 3.25 percent.

Hungary’s forint tumbled as much as 2.4 percent to a record low of 303.19 versus the euro and extended this year’s decline to 11.6 percent on concern the economic slowdown will worsen. The Polish zloty slumped as much as 3.8 percent to 4.6720, the weakest level since June 2004.

Under ‘Pressure’

“Central, Eastern European currencies are under a lot of pressure,” said Karthik Sankaran, a money manager and principal in New York at Covepoint Capital Advisors, an emerging-market trading firm. “The concern may extend to core European countries, which have a lot of exposure to the region. That’s a nagging issue for the euro.”

The euro fell earlier to near an eight-week low versus the dollar after the European Union statistics office in Luxembourg reported that the price of goods leaving euro-area factories dropped 1.3 percent in December after a 2 percent decline in the previous month.

ECB President Jean-Claude Trichet reiterated in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, last week that the central bank’s next important meeting is in March, signaling policy makers will keep the benchmark rate unchanged at 2 percent on Feb. 5.

The ICE’s Dollar Index, which tracks the greenback versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the franc, lost 1.2 percent as more Americans signed contracts in December to buy previously owned homes, reducing demand for the safety of the world’s reserve currency.

The index of pending home resales climbed 6.3 percent to 87.7, the first increase since August, from 82.5 in November, the National Association of Realtors said today.

“The market is grasping for any kind of ray of hope it can find,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “So risk aversion is receding a bit, and that works into U.S. dollar selling.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net;Whitney Kisling in New York at wkisling@bloomberg.net

Last Updated: February 3, 2009 16:07 EST

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One Response to “The Decline of the Dollar Begins as Risk abates”

  1. I have looked over your blog a few times and I love it.

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