Dollar Touches Highest Since 2006 as Banks Spur Refuge Demand

By Molly Seltzer

March 7 (Bloomberg) -- The dollar reached the highest since April 2006 against the currencies of six U.S. trading partners as investors sought safety after American International Group Inc. got more government support and Federal Reserve Chairman Ben S. Bernanke said the banking system isn’t yet stabilized.

Japan’s currency declined for a sixth week against the dollar, the longest losing streak since June 2007, on concern the nation’s recession will deepen. The dollar pared gains yesterday on speculation U.S. job losses began to level off in February, encouraging some demand for higher-yielding assets.

“We saw a bounce in risk appetite late this week, but if the dollar was truly out of favor, you’d see the dollar selling against the euro and also the yen,” said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. “That hasn’t happened. The safe-haven status of the dollar is unassailable.”

The U.S. currency rose 0.1 percent to $1.2653 per euro from $1.2669 on Feb. 27. The yen declined 0.7 percent to 98.25 per dollar this week from 97.57. Japan’s currency lost 0.6 percent to 124.34 per euro from 123.61.

The Dollar Index, which the ICE uses to track the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, increased to 89.624 on March 4, the highest level since April 2006, before ending the week up 0.6 percent.

Weaker Pound

The pound fell for a second week against the dollar, dropping 1.6 percent to $1.4094 as the Bank of England on March 5 said it will pump cash into the economy by purchasing as much as 150 billion pounds ($211 billion) in government and corporate bonds, a policy known as quantitative easing. The BOE’s main rate was cut to 0.5 percent, the lowest level since the bank was founded in 1694.

Sterling depreciated 27 percent against the dollar and 23 percent versus the euro last year as the economy faced its first recession since 1991.

“A move by the Bank of England to implement quantitative easing should over time add to the downward pressure on the pound,” Deutsche Bank AG strategists John Horner in Sydney and Adam Boyton in New York wrote in a note to clients this week. The firm is the world’s largest currency trader.

The same day as the BOE’s decision, European Central Bank President Jean-Claude Trichet signaled policy makers will reduce borrowing costs further to combat a deepening recession after lowering the main refinancing rate to 1.5 percent, the lowest level since the 16-nation euro debuted in 1999.

Yen Versus Franc

Japan’s currency dropped 1.5 percent to 84.83 versus the Swiss franc and 1.3 percent to 63.13 against the Australian dollar as the world’s second-largest economy weakened.

The yen lost 6.3 percent against the dollar since Feb. 16, when the Japanese government said the economy shrank an annualized 12.7 percent last quarter, the biggest contraction since the 1974 oil crisis.

The economic data have been “much worse” than expected, and the government will need to revise its gross domestic product forecast soon, Finance Minister Kaoru Yosano told reporters in Tokyo yesterday.

The dollar and yen dropped yesterday against the euro on speculation the rate of U.S. job losses slowed, reducing demand for the currencies as havens.

“Markets were bracing themselves for a bigger reduction in payrolls,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “More risk- aversion positions have to be unwound.”

U.S. Job Market

U.S. employers eliminated 651,000 jobs last month, following a reduction of 655,000 in January, the Labor Department reported yesterday. The median forecast of economists surveyed by Bloomberg News was for a decrease of 650,000. The jobless rate increased to 8.1 percent, the highest level since December 1983, from 7.6 percent in the previous month.

Policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits, Bernanke said in testimony before the Senate Budget Committee on March 3.

“Although progress has been made on the financial front since last fall, more needs to be done,” Bernanke said.

AIG, the New York-based insurer deemed too important to fail, a day earlier posted the worst loss by any U.S. corporation and said it will get as much as $30 billion in new government capital.

The New Zealand dollar slid 0.3 percent to 50.26 U.S. cents as its Treasury Department said this week the economy may contract more this year than forecast in December. Policy makers will lower the 3.5 percent official cash rate by 0.75 percentage point on March 12, according to the median forecast of 11 economists surveyed by Bloomberg News.

South Africa’s rand was the biggest loser versus the dollar this week, dropping 3 percent to 10.4334. Manufacturing, which accounts for 16 percent of the economy, fell for a 10th month in February, a report showed.

To contact the reporter on this story: Molly Seltzer in New York at mseltzer4@bloomberg.net

Last Updated: March 7, 2009 08:00 EST