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Dollar Gains for Third Week Versus Euro, Advances Against Yen

Dollar Gains for Third Week Versus Euro, Advances Against Yen

April 2 (Bloomberg) -- The dollar rose for a third week against the euro and the yen as industry reports showed prices paid by U.S. manufacturers jumped last month and services industries expanded at a quicker pace.

Faster growth and inflation may bolster expectations the Federal Reserve will keep increasing interest rates to contain inflation as the U.S. economy outpaces Europe's for a fourth year. The dollar gained 4.6 percent versus the euro last quarter, the biggest advance since the first three months of 2001.

``The foreign-exchange market is focusing on inflation,'' said Robert Lynch, a currency strategist at BNP Paribas in New York. The dollar may rise to $1.2850 per euro next week, he said.

Against the euro this week, the dollar climbed 0.3 percent to $1.2912 at 5 p.m. yesterday in New York, according to electronic currency-trading system EBS. The dollar rose 1.1 percent to 107.56 yen. It touched 107.79 against Japan's currency yesterday, the highest since Oct. 21.

The industry reports yesterday, one of which was accidentally released early, sparked a rally in the U.S. currency after it initially fell following the Labor Department's monthly U.S. payrolls report. Employers added 110,000 workers in March, barely half the number economists expected. The euro fluctuated almost 2 cents against the dollar in less than two hours.

`Blood Bath'

``A lot of players established short dollar positions at bad levels,'' said Tom Benfer, vice president of foreign exchange in New York at the Bank of Montreal. ``As the market turned stronger for the dollar, it turned into a blood bath.'' A short position is a bet on a currency's decline.

Demand for the yen waned this week after the Bank of Japan's Tankan survey showed confidence among large manufacturers unexpectedly fell in March and the government said industrial production slid 2.1 percent in February, the biggest drop in a year. The unemployment rate rose and household spending dropped in February, separate reports showed.

``Japan's economy is in trouble,'' said Craig Ferguson, a currency strategist in Melbourne at Australia & New Zealand Banking Group. ``There's no reason to own yen at these levels given the economic outlook.''

In the U.S, the Institute for Supply Management said its services index rose to 63.1 from 59.8. ISM's manufacturing prices index rose to 73 from 65.5. Several news organizations, including Bloomberg News and Market News, initially published incorrect headlines for the manufacturing report after BusinessWire, a press release company, sent out ISM's separate services press release early by mistake.

'Catching Up'

``The very strong rise in the prices-paid number is compounding worries about inflation,'' said Mitul Kotecha, head of currency strategy in London at Calyon, a unit of Credit Agricole SA. ``Interest rates have moved in the dollar's favor in the past few months, and it's got some catching up to do.''

Fed policy makers raised their target rate for overnight loans between banks by a quarter-point to 2.75 percent on March 22, the seventh increase since June, and said inflation pressures are building. The European Central Bank hasn't changed its benchmark rate of 2 percent since 2003 while the Bank of Japan has held its rate near zero for four years.

Fed Bank of Chicago President Michael Moskow said yesterday inflation is increasingly a worry. Moskow, who votes on interest rates this year, said ``there are some more concerns about inflation now,'' in an interview with CNBC television yesterday.

The dollar is up more than 5 percent from a record low of $1.3666 per euro on Dec. 30 as the yield advantage, or spread, on U.S. 10-year Treasury notes over German bunds of similar maturity widened to near the biggest since 2000. The gap reached as high as 93 basis points, or 0.93 percentage point, this week.

'Attention on Inflation'

Investors are ``placing less emphasis on payrolls figures at the moment and putting its attention on inflation and how the Fed might react,'' said Trevor Dinmore, vice president of foreign- exchange strategy at Deutsche Bank AG in London. ``That negates some of the negative effect of the poor payrolls report on the dollar we saw earlier.''

Goldman Sachs Group Inc. and Merrill Lynch & Co. raised their forecasts for Fed interest-rate increases because of concern inflation is accelerating, before yesterday's reports were released.

Goldman, the world's third-biggest securities firm by capital, lifted its year-end forecast for the Fed's main rate to 4 percent, from 3.5 percent. Merrill, the biggest, raised its projection to 3.5 percent, from 3.25 percent.

Tankan Survey

Japan's quarterly Tankan survey showed business confidence fell for a second quarter, the first back-to-back drop since 2001, when the economy shrank. The confidence index dropped to 14 in March from 22 in December. The median forecast in a Bloomberg survey was 22, and the lowest estimate was 15.

``The economy was progressing fairly well early last year and it's all fallen flat since then,'' said Ian Gunner, head of currency strategy at Mellon Financial Corp. in London. ``There's some risk that money will be pulled out of Japan and the yen could weaken to 110'' in the next month.

``The Tankan was wretched,'' said Marshall Gittler, a foreign-exchange strategist in Tokyo at Deutsche Bank AG. ``Investors may sell Japanese assets on the back of this.''

To contact the reporters on this story:
Mark Tannenbaum in New York at [e-mail]
Vivianne C. Rodrigues in New York at [e-mail].

To contact the editor responsible for this story:
Dan Moss at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000087&refer=top_world_news&sid=ahJH6vtIiG2g