Dollar Declines as Bank Support Reduces Demand for Safe Haven

By Ye Xie and Matthew Brown

Feb. 26 (Bloomberg) -- The dollar fell against the euro, pound and Canadian dollar on speculation government efforts to support banks will reduce demand for the world’s reserve currency as a haven from the financial crisis.

A gauge tracking the dollar against the currencies of six major U.S. trading partners fell as President Barack Obama proposed as much as $750 billion in new aid for the financial industry and the U.K. extended guarantees on distressed assets of banks. The yen slid beyond 98 per dollar for the first time since November as Japan’s recession and U.S. stock gains discouraged investors from taking refuge in the currency.

“The sentiment has improved as the governments move to mitigate the uncertainty in the crisis,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank by assets. “That’s keeping the dollar at bay.”

The dollar lost 0.2 percent to $1.2747 per euro at 9:50 a.m. in New York, from $1.2723 yesterday. Japan’s currency slid 0.5 percent to 97.91 per dollar from 97.39, touching 98.21, the weakest level since Nov. 11. Japan’s currency depreciated 0.7 percent to 124.82 per euro from 123.92 and reached 125.72, the weakest level since Jan. 8.

The pound increased 1 percent to $1.4347, while the Canadian dollar gained 1 percent to C$1.2444 versus the greenback as higher-yielding assets became more attractive.

ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell 0.6 percent to 87.422. It touched 88.254 on Feb. 18, the strongest level since a 2 1/2-year high reached on Nov. 21.

Stocks Gain

The Standard & Poor’s 500 Index added 0.6 percent on Obama’s budget proposal, while Europe’s Dow Jones Stoxx 600 Index climbed 1.5 percent.

Japan’s currency was headed for an 8.4 percent loss against the dollar in February, the biggest monthly drop since 1995, as traders bet the deteriorating Japanese economy will lead to deflation, reducing the currency’s appeal as a refuge from the global financial crisis.

Consumer prices excluding fresh food fell 0.1 percent in January from a year earlier, according to the median forecast of 32 economists surveyed by Bloomberg News. The unemployment rate probably rose to 4.6 percent last month, the highest level since February 2005, a separate survey showed. Reports on inflation and unemployment are due tomorrow.

The trade deficit widened in January to the most in two decades as exports slumped by 46 percent, the Finance Ministry said yesterday in Tokyo. A Cabinet Office report last week showed the economy shrank the most in the last quarter since the 1974 oil shock.

‘Cataclysmic’ Exports

“The export figures yesterday were cataclysmic,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “There’s a great chance that the Bank of Japan is going to turn on the printing press again, and then we’re back to where we were in 2001.”

The Bank of Japan maintained a policy of flooding the financial system with cash from March 2001 through March 2006 to counter deflation.

The yen’s drop against the dollar may be tempered as the currency approaches resistance at 98.90, a 50 percent Fibonacci retracement of the dollar’s drop from the August high of 110.66 yen to the January low of 87.13 yen, according to Tomoko Fujii, a rates and currency strategist at Bank of America Securities- Merrill Lynch Japan. Resistance is a level where sell orders may be clustered.

‘A Bit Excessive’

Swings in the yen have been a “a bit excessive,” and the degree of fluctuations in currencies, rather than their levels, warrant close attention, Bank of Japan board member Tadao Noda said today.

“It’s important for companies and households that currencies generally move in a stable manner,” Noda told reporters in Naha, Okinawa.

The euro is poised for a 0.3 percent loss against the dollar, its second straight decline, on concern financial turmoil in Europe will worsen, supporting the case for the region’s central bank to lower interest rates.

European confidence in the economic outlook dropped to the lowest on record in February, the European Commission in Brussels said today, increasing pressure on the European Central Bank to loosen monetary policy. German unemployment rose in February by a seasonally adjusted 40,000 to 3.31 million, a fourth straight monthly increase, the Federal Labor Agency said.

ECB Outlook

The ECB is “obliged” to study the use of unconventional policy tools to revive the economy, ECB Governing Council member Miguel Angel Fernandez Ordonez told reporters in Madrid yesterday, adding that a review of possible steps is “progressing.”

Unconventional measures may include so-called quantitative easing, in which the ECB may buy government securities to lower interest rates.

S&P cut Ukraine’s credit rating yesterday by two levels after it downgraded Latvia’s debt to junk on Feb. 24. The euro dropped 1.7 percent versus the dollar on Feb. 17, when Moody’s Investors Service said the credit ratings of Austrian, Swedish and other banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net

Last Updated: February 26, 2009 09:54 EST