Dollar Advances as Global Optimism Wanes, Asian Stocks Decline

By Yasuhiko Seki and Ron Harui

May 14 (Bloomberg) -- The dollar strengthened for a second day against the euro as Asian stocks extended a global slump, spurring demand for the relative safety of the U.S. currency.


The euro declined to the lowest level in almost a week versus the greenback on speculation European Central Bank officials will today signal they plan to take further unconventional measures to keep down borrowing costs. Asian currencies weakened, led by the South Korean won, on concern a U.S. jobs report today will show the global economy continues to deteriorate, damping the appetite for emerging-market assets.

“Riskier investments are being unwound, as reflected by the declines in Asian equities,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “Against that backdrop, the yen is likely to strengthen beyond 95 per dollar while the greenback will probably be bought versus other major currencies.” 

The dollar advanced to $1.3557 per euro as of 1:18 p.m. in Tokyo from $1.3600 yesterday in New York, when it reached $1.3722, the highest since March 23. The U.S. currency rose to 95.48 yen from 95.30. The yen traded at 129.44 per euro from 129.61, after earlier climbing to 128.87, the strongest level since April 29.

The won slumped 2 percent to 1,268.75 per dollar, and the Malaysian ringgit declined 0.7 percent to 3.5555. The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose for a second day, gaining 0.3 percent to 82.770.

Stocks Decline 

The Nikkei 225 Stock Average fell 2.8 percent and the MSCI Asia-Pacific Index of regional shares headed for its biggest drop since March 30. The Standard & Poor’s 500 Index slumped for a third straight day yesterday, losing 2.7 percent.

The dollar and the yen gained versus higher-yielding currencies yesterday after the U.S. Commerce Department said retail sales unexpectedly fell 0.4 percent in April. The median forecast of economists surveyed by Bloomberg was for no change.

“Recent economic data are disappointing investors hoping for a rapid and robust global recovery,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Any faltering in risk appetite should help support ‘safe- haven’ currencies like the dollar and the yen.”

Initial U.S. jobless claims rose to 610,000 in the seven days ended May 9 from 601,000 a week earlier, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure today.

Options

The yen weakened against the dollar for the first time in five days because of selling to protect options that would become worthless should Japan’s currency rise further, according to Shinichi Hayashi, a foreign-exchange dealer at Shinkin Central Bank Ltd. in Tokyo.

“There’s going to be defensive selling of yen as it comes closer to 95 yen where pre-set option orders are placed,” Hayashi said. 

Options grant the holder the right to buy or sell a currency at a set price on a fixed date. An option ceases to exist should the underlying currency rise or fall to a knock-out trigger. Traders use knock-outs to reduce the premium paid for option contracts.

The euro extended losses after falling from a seven-week high versus the dollar yesterday when ECB council member Marko Kranjec said in an interview in Ljubljana that “we don’t exclude” the purchase of first-class corporate bonds and short- term securities such as commercial paper in the central bank’s asset-purchase program.

‘Top-Heavy’ 

“The markets have begun to think there’s a possibility the ECB may commit to non-traditional steps,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. “The euro is likely to be top-heavy.”

ECB Vice President Lucas Papademos will speak at 10 a.m. in Vienna, Executive Board member Jose Manuel Gonzalez-Paramo will speak at 5:30 p.m. in Sevilla, Spain, and Executive Board member Juergen Stark will speak at 6:20 p.m. in Berlin.

European policy makers cut the benchmark interest rate to a record low of 1 percent on May 7 and announced a plan to buy 60 billion euros ($82 billion) in covered bonds to loosen the credit market.
The ECB won’t spend more than that level, said Axel Weber, a council member who heads Germany’s Bundesbank, in a speech in London yesterday. Weber cautioned against too much monetary- policy stimulus.
The won weakened for a third day on renewed concern over the global recession and as overseas investors sold more Korean shares than they bought for a second day. The Kospi stock index declined 2.2 percent, the biggest drop in two weeks.

“A retreat in local stocks is adding to the won’s decline,” said Sam Hong, a foreign-exchange dealer at Shinhan Bank in Seoul.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: May 14, 2009 00:20 EDT