Making Unique Observations in a Very Cluttered World

Saturday, 19 September 2009

Dollar Falls to One-Year Low v euro after Federal Reserve Chairman Ben Bernanke says recession is likely over

Reading - Dollar Falls to One-Year Low v euro after Federal Reserve Chairman Ben Bernanke says recession is likely over - http://j.mp/3WogLq

The dollar dropped to the lowest level in a year versus the euro as Federal Reserve Chairman Ben S. Bernanke’s declaration that the recession is likely over led investors to sell the U.S. currency and buy riskier assets.

Sterling fell this week against all of its 16 most-traded counterparts tracked by Bloomberg on revived concern banking losses will stall the U.K.’s economic recovery. The Fed will likely keep its target lending rate at near zero next week and extend the end date of its $1.45 trillion program to buy securities, a strategy known as quantitative easing.

“The dollar will come under further pressure,” said Ian Stannard, a senior currency strategist at BNP Paribas SA in London, in an interview on Bloomberg Television. “This continuation of the quantitative-easing program will provide further asset-market support. That’s going to lead to dollar weakness as funds flow out of the U.S., seeking higher returns elsewhere.”

The dollar fell 1 percent to $1.4712 per euro, from $1.4571 on Sept. 11. It touched $1.4767 on Sept. 17, the weakest level since September 2008. The dollar rose 0.6 percent to 91.29 yen, from 90.71, after touching 90.13 three days ago, the lowest level since Feb. 12. The yen weakened 1.6 percent to 134.33 versus the euro, from 132.17 a week earlier.

The greenback declined this week to the lowest level in more than a year against the Australian and New Zealand dollars and the Swiss franc on speculation investors bought high- yielding assets with funds borrowed in the U.S.

Tumbling Libor

The cost of three-month loans in dollars between banks fell to a record low of 0.289 percent yesterday, according to the British Bankers’ Association. The London interbank offered rate, or Libor, is lower than that of the yen and Swiss franc, making the dollar the cheapest funding currency.

The Fed will keep its target rate for overnight loans in a range of zero to 0.25 percent at its two-day policy meeting starting Sept. 22, according to all 90 economists surveyed by Bloomberg News. The central bank decided in August to end purchases of up to $300 billion in Treasury debt next month.

Bernanke said in Washington on Sept. 15 that the worst U.S. recession since the 1930s has probably ended, while cautioning that growth may not be strong enough to reduce the unemployment rate quickly. Reports showed U.S.retail sales increased in August more than forecast and German investor confidence rose this month to the highest level in more than three years.

Weaker Sterling

Sterling slid 3.4 percent versus the euro this week, touching 90.57 pence yesterday, the weakest level since April 24. Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, said it may pull out of the government’s asset-insurance program as the Financial Times reported that the bank’s capital position was too weak for it to do so. The pound depreciated 2.3 percent to $1.6271 and slipped 1.7 percent to 148.55 yen.

New Zealand’s kiwi appreciated 0.1 percent in a 10th consecutive weekly gain that matched a rally in 1999. It reached 71.58 cents on Sept. 17, the highest level since August 2008. Australia’s dollar rose 0.4 percent after reaching 87.75 cents the same day, also the highest level since August of last year.

The franc advanced 0.8 percent after touching 1.0276 on Sept. 17, the strongest level since July 2008. A report this week showed Swiss investor confidence jumped to a record in September, indicating the economy may be pulling out of its worst recession in three decades.

Relative Strength

The U.S. currency rose yesterday for the first time this week against the euro as the 14-day relative strength index on the euro-dollar exchange rate climbed on Sept. 17 to 74, the highest level since March. A reading of 70 may indicate a rally is approaching an extreme and a reversal is imminent. The dollar lost almost 3 percent since the end of August.

“The euro could well be set for a period of consolidation or even some correction,” Derek Halpenny, European head of currency strategy in London at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a client note yesterday. A “period of correction in equity markets would reinforce the probability of some stability for the dollar.”

Japan’s currency declined 2.7 percent to 13.32 against the Swedish krona and 2 percent to 50.54 versus the Brazilian real on speculation repatriation of funds by Japanese companies will run its course at the end of September, when the fiscal half- year closes in Japan.

The currency touched a seven-week high versus the dollar on Sept. 16 after Japan’s Finance Minister Hirohisa Fujii declined to embrace a “weak” currency, fueling speculation that the new government opposes intervening in the market to restrain the currency’s strength. The yen slid versus the dollar yesterday after Fujii told reporters that exchange rates should reflect economic fundamentals and that he doesn’t want to be labeled as a “supporter of a strong yen.”