Dollar May Extend Decline on Easing Risk Aversion, Stock Gains
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By Yasuhiko Seki and Daniel Kruger
Dec. 10 (Bloomberg) -- The dollar may extend its decline from near a one-month high against the euro as signs of an economic recovery and a rebound in U.S. stocks helped ease risk aversion and revived demand for higher-yielding assets.
The 16-nation euro may advance before reports today that economists say will show industrial production in France and Italy rose, adding to signs the eurozone economy is recovering. New Zealand’s dollar rose for a second day as Reserve Bank Governor Alan Bollard said he expects to begin raising interest rates in the middle of next year.
“An improvement of economic conditions support gains in stocks and risk appetite,” said Masashi Nakamura, a Tokyo-based economist at Mizuho Research Institute Ltd. “This may then lead to dollar-selling.”
The dollar traded at $1.4737 per euro as of 8:05 a.m. in Tokyo from $1.4726 yesterday in New York when it touched $1.4668, the strongest level since Nov. 3. The yen was at 129.74 per euro from 129.39. Japan’s currency bought 88.07 per dollar from 87.87.
New Zealand’s dollar rose to 72.26 U.S. cents from 71.89 cents yesterday, when it jumped 1.7 percent. The currency bought 63.57 yen from 63.16 yen.
The U.S. currency and stocks have tended to trade in opposite directions since the start of the financial crisis. The 120-day correlation coefficient between the Dollar Index and the Standard & Poor’s 500 Index was minus 0.47 yesterday. A value of minus one would mean the two move in perfect opposition.
Stocks Gain
The Standard & Poor’s 500 Index increased 0.4 percent yesterday after earlier dropping as much as 0.6 percent. The Dow Jones Industrial Average gained 0.5 percent.
The euro rose against 11 of the 16 most-active currencies on speculation an improving economy will allow the European Central Bank to exit its accommodative policy before the Federal Reserve and the Bank of Japan.
Italian production rose 1.3 percent in October following a 5.3 percent drop the previous month, according to a Bloomberg News survey before the national statistics office releases the data today. Output in France gained 0.7 percent in October from September following a 1.5 percent drop the prior month, according to a separate Bloomberg survey before today’s report.
European Central Bank Governing Council member Axel Weber said this week the ECB’s main refinancing operation will be the last tender to be switched from unlimited funding to its pre- crisis variable-rate allotment procedure.
ECB ‘Unwinding’
The discontinuation of the ECB’s six-month and 12-month tenders “is an unwinding of an ultra-expansionary” liquidity policy, Weber said. “I wouldn’t call this a tightening. We neither wanted to send a restrictive nor an expansionary signal.”
The ECB decided on Dec. 3 to end long-term emergency loans and to tighten the terms of its final 12-month tender as financial markets recover from the worst crisis since the Great Depression. Economists expect the Frankfurt-based central bank to increase borrowing costs in the third quarter of 2010, according to a Bloomberg News survey.
New Zealand’s dollar was the biggest gainer against the U.S. currency today after Reserve Bank Governor Alan Bollard said he expects to begin raising rates around the middle of 2010.
“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” Bollard said in a statement.
New Zealand’s economy will expand 1.9 percent in the first quarter of 2010 from a year earlier, the bank said in new forecasts published today. That’s better than the 1.3 percent pace predicted in September. Annual growth will accelerate to 4.2 percent by the first quarter of 2011, the bank said.
Benchmark interest rates are 3.75 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
Last Updated: December 9, 2009 18:16 EST
