Dollar Weakens Past $1.50 Per Euro First Time in 14 Months

The dollar weakened to $1.50 per euro for the first time in 14 months as more evidence of a recovery in the global economy from recession increased demand for higher-yielding assets. 

 

The Canadian dollar fell against most of its major rivals this week after Bank of Canada Governor Mark Carney said Oct. 22 that intervention to weaken the currency “is always an option.” The U.S. economy expanded in the third quarter for the first time since June 2008, a Commerce Department report will show next week, according to the median estimate of 65 economists in a Bloomberg survey.

“We’ve reached these milestones,” said Andrew Chaveriat, a currency strategist at BNP Paribas Securities SA in New York. “The downtrend in the dollar is still there.” 

The dollar fell 0.7 percent this week to $1.5008 per euro, from $1.4905 on Oct. 16. The U.S. currency touched $1.50 on Oct. 21 for the first time since August 2008. The yen declined 1.3 percent to 92.06 versus the dollar, from 90.89, in its biggest decline since August. Japan’s currency depreciated 2 percent to 138.15 per euro, compared with 135.48 a week earlier. 

The pound fell 1 percent this week to 92.02 pence per euro after the U.K.’s economy unexpectedly contracted, fueling speculation that the Bank of England will increase its 175 billion-pound ($286 billion) program to buy bonds. 

The Office for National Statistics said yesterday that U.K. gross domestic product dropped for a sixth month, declining 0.4 percent in the third quarter from the second. Economists predicted a 0.2 percent increase in a Bloomberg News survey. 

Dollar Index 

The U.K. central bank began buying government and company debt with newly printed money in March as it sought to hold down borrowing costs in an attempt to haul the economy out of deepest recession since World War II. 

“The U.K. is showing it’s a laggard compared to the rest of Europe,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. The Bank of England “might have to extend” asset purchasing, he said. 

 

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the euro, yen, Swiss franc, pound, Swedish krona and Canadian dollar, touched 74.94 on Oct. 21, the lowest level since August 2008, as optimism about the global recovery increased. Reports this week showed German business confidence rose to the highest level in 13 months and China’s economy grew at 8.9 percent in the third quarter, the fastest pace in a year. 

Refuge Demand Reversed 

All but 20 of the 138 companies in the Standard & Poor’s 500 Index that reported third-quarter results this week beat the average analyst estimate, including Apple Inc., Caterpillar Inc. and Morgan Stanley, according to data compiled by Bloomberg. 

The greenback reached a 2 1/2-year high against the euro on Oct. 28, 2008, as investors sought the safety of U.S. government debt after the Sept. 15, 2008, bankruptcy of Lehman Brothers Holdings Inc. froze credit markets. 

The dollar has plunged 18 percent from that level as efforts by global central banks restored liquidity and signs of economic recovery encouraged investors to buy higher-yielding assets at the expense of the greenback. The Federal Reserve’s benchmark interest rate is near zero, compared with 3.25 percent in Australia and 2.5 percent in New Zealand. 

A weak dollar helped push crude oil to $82 a barrel this week and copper prices to the highest level in a year. 

Central banks from Europe to South America are trying to find ways to slow the appreciation of their currencies versus the dollar as more expensive exchange rates threaten their exports.

Real’s Appreciation 

Brazil announced on Oct. 19 that it’s imposing a 2 percent tax on foreign purchases of fixed-income securities and stocks to curb the real’s 35 percent appreciation this year. The real, the best performer among major currencies in 2009, lost 0.3 percent this week to 1.7173 per dollar, its first weekly drop since August. 

Canadian central bank Governor Mark Carney said on Oct. 22 that investors lost their “focus” on the central bank’s commitment to meet a 2 percent inflation target, and that action to weaken the currency is “an option.” The Canadian currency lost 1.6 percent to C$1.0538 per dollar this week, ending a three-week rally and reducing its gain this year to 16 percent. 

In Europe, officials voiced concern that the euro’s gain versus the dollar may delay economic recovery. An exchange rate of $1.50 for the currency “is a disaster for the European economy and manufacturing sector,” said Henri Guaino, counselor to French President Nicolas Sarkozy, at a conference in Paris. 

Interest Rate Speculation 

The dollar recovered some lost ground yesterday and Treasury yields rose after Philadelphia Fed President Charles Plosser told Bloomberg Radio on Oct. 22 that his “instinct is the time for raising rates will be before many of my colleagues” think it is. 

“The market is anticipating a more hawkish posture out of the Fed and that in turn is turning into better yields, and the most direct way that’s reflected in the currency market is dollar-yen,” said Boris Schlossberg, director of currency research at online currency trader GFT Forex in New York. “There’s a potential that they could even raise rates in the first half of 2010.” 

The U.S. gross domestic product probably grew 3.2 percent in the third quarter, after contracting 0.7 percent the previous three months, according to the Bloomberg survey. The Commerce Department report is due Oct. 29. 

- Via Bloomberg