Dollar Slips Beyond $1.40 per Euro for First Time Since January

May 22nd, 2009

By Ye Xie and Oliver Biggadike

The dollar declined beyond $1.40 against the euro for the first time since January on concern U.S. creditworthiness deteriorated and near-zero borrowing costs made the nation’s assets less attractive to investors.

The yen touched a nine-week high versus the dollar after Japan’s Finance Minister Kaoru Yosano said the government won’t intervene in the currency market and the Bank of Japan raised its economic assessment. The dollar headed for its biggest weekly drop versus the euro since March after Pacific Investment Management Co.’s Bill Gross said yesterday the U.S. will “eventually” lose its AAA credit rating.

“The credit-rating story is bubbling to the surface,” said Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. “When you have a beginning of a global recovery, the fragility for the bond and the dollar is the most as capital may find a better place to go. You cannot fight the move.”

The dollar slid 0.9 percent to $1.4011 per euro at 2:53 p.m. in New York, from $1.3890 yesterday, after reaching $1.4051, the weakest level since Jan. 2. The yen declined 0.4 percent to 94.79 per dollar from 94.41, after touching 93.86, the strongest level since March 19. The yen lost 1.3 percent to 132.80 versus the euro from 131.15.

The U.S. currency slumped 3.7 percent versus the euro this week, heading for the biggest loss since the five days ended March 20, when it tumbled 4.8 percent. The dollar lost 0.4 percent versus the yen, and the euro gained 3.4 percent.

Credit-Default Swaps

The cost to hedge against losses on U.S. government bonds for five years climbed to a three-week high, indicating perception the nation’s credit quality is deteriorating. Credit- default swaps on U.S. debt rose 3.5 basis points to 41, the highest since April 29, according to prices from CMA Datavision in New York. Five-year contracts on Japan’s sovereign bonds fell to 46 from 50. A basis point is 0.01 percentage point.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating cut, said Gross, co-chief investment officer of Newport Beach, California-based Pimco, in an interview yesterday on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

White House Press Secretary Robert Gibbs said at his regular briefing today that he doesn’t believe the U.S.’s AAA credit rating will be cut.

The euro pared gains against the dollar as Luxembourg Finance Minister Jean-Claude Juncker told Reuters extended gains in the 16-nation currency would hamper a recovery in the region’s economy.

Canadian Dollar

The Canadian dollar advanced as much as 1.6 percent today to C$1.1197, the strongest level since Oct. 9, while New Zealand’s currency climbed to 62.38 U.S. cents, the highest level since Oct. 21. The Australian dollar reached 78.67 U.S. cents, the highest level since Oct. 2.

The administration of President Barack Obama will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

Treasury Secretary Timothy Geithner said yesterday in an interview on Bloomberg TV that he’s committed to minimizing the federal budget deficit, targeting a reduction to 3 percent of gross domestic product or smaller, compared with a projected 12.9 percent this year.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a research note today. “The first considerations will likely be hard currencies that are liquid. On these counts, the likes of the euro, yen, Australian dollar and Canadian dollar will win out.”

Dollar Index

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 0.9 percent to 79.812 after touching 79.805, the lowest level since Dec. 29. The gauge of the greenback fell 3.9 percent this week and dropped 11 percent from a three-year high reached on March 4.

The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy. The central bank’s target range for overnight loans between banks is zero to 0.25 percent.

Some Fed policy makers indicated at the April 28-29 policy meeting that the central bank might have to increase its purchase of assets should the economy or financial markets deteriorate further, minutes released this week showed.

Rosengren on Economy

An economic recovery from the most severe recession in at least 50 years may be muted as banks reduce troubled assets and consumers boost savings, Boston Fed President Eric Rosengren said yesterday in Worcester, Massachusetts.

The yen strengthened against the dollar as the Bank of Japan kept its target lending rate at 0.1 percent at the end of its policy meeting today and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

Japan’s currency headed for a thirdly weekly gain versus the greenback after Finance Minister Yosano said the “government isn’t considering currency intervention at this point.” Waning global sales and a 10 percent gain in the yen versus the dollar in the past year hurt exporters including Toyota Motor Corp.

Policy makers haven’t fully analyzed why the yen is gaining, Yosano said at a press conference today in Tokyo. Central banks intervene when they buy or sell currencies to influence exchange rates.

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