By Yasuhiko Seki and Anchalee Worrachate
The Dollar Index declined to a four-month low after former U.S.
comptroller general David Walker wrote in a Financial Times opinion piece that the nation’s AAA credit rating may be cut because the government can’t control spending. Australia’s dollar strengthened after better-than-expected Chinese retail sales data spurred optimism the world’s third-largest economy is improving, boosting demand for higher-yielding assets.
“Euphoria-driven price action is at work as economic data at home and abroad support the view that the worst of the global recession may be over,” said Kengo Suzuki, manager of the foreign bond trading department at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “Safe-haven currencies will stay out of favor, reflecting an improvement in risk appetite.”
The dollar weakened to $1.3696 per euro at 8:50 a.m. in London from $1.3648 yesterday in New York. It earlier touched $1.3722, the lowest level since March 23. The U.S. currency was at 96.41 yen, from 96.45. The euro rose to 132.05 yen, from 131.63.
China’s retail sales rose 14.8 percent in April from a year earlier, after climbing 14.7 percent in March. The median estimate of economists in a Bloomberg survey was for a 14.5 percent gain. Industrial output rose 7.3 percent after increasing 8.3 percent in March.
Australian Dollar
The Nikkei 225 Stock Average gained 0.5 percent and the MSCI World Index was little changed. Standard & Poor’s 500 Index futures slid 0.3 percent.
The Australian dollar rose for a second day against the U.S. currency, climbing to 76.82 U.S. cents from 76.50 cents yesterday. It advanced to 73.92 yen from 73.78 yen.
Developments in emerging Asia “will be crucial” for the Australian dollar, analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy for BNP Paribas SA, wrote in a note to clients yesterday. “The Australian dollar is likely to remain an outperformer.”
Australia’s currency rose more than 20 percent against the yen in the past three months on speculation investors resumed carry trades, in which they get funds in countries with low borrowing costs and buy assets where rates are higher. The risk is that currency fluctuations can wipe out gains. Japan’s 0.1 percent target lending rate compares with 3 percent in Australia.
‘Underlying Risk’
The U.S. government should create a “fiscal future commission” to rein in the country’s finances because its AAA credit rating may be lowered, Walker wrote in the FT today. The commission should consider every option including budget controls and tax hikes, he said.“The FT article came as a reminder of the biggest underlying risk for the dollar,” said Osamu Takashima, chief foreign exchange analyst at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest bank. “If people start to question seriously the U.S.’s ability to sell swelling debt smoothly, the dollar may be sold to 90 yen and $1.40 per euro.”
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, fell to 82.033, from 82.306 yesterday. It earlier reached 81.871, the lowest since Jan. 9.
‘Negative Bent’
“There’s a developing backlash against the dollar,” said Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Sydney. “There has been some chatter about its fundamentals with a Financial Times editorial talking about it maybe losing its AAA rating. That’s set people off on a negative bent.”
When the Daily Telegraph on April 24 carried an article warning of the downgrade risk for U.K.’s sovereign debt rating, Britain’s pound slumped more than 1 percent against the dollar and the yen.
Standard & Poor’s cut Ireland’s credit rating to AA+ from AAA in March as financial turmoil drove up borrowing costs and swelled the nation’s budget deficit. S&P lowered the ratings of Spain, Portugal and Greece in January.
The euro gained for a second day against the dollar and the yen before a European Union report today that may show the contraction in industrial production slowed in March, adding to signs the recession in the 16-nation region is easing.
European Central Bank governing council member Nout Wellink said in an interview with Dutch public television VARA yesterday the deterioration of the European economy seems to be slowing.
Industrial Production
“Investors are putting funds in higher-yielding, emerging- market assets including those in Europe amid the view that the worldwide slump is waning,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is why the euro and the Australian dollar are being bought.”
Industrial output in the euro area fell 17.6 percent in March from a year earlier, after a 18.4 percent decrease in February, according to a Bloomberg survey of economists. The report is scheduled for release at 11 a.m. in Luxembourg.
Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.
Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.
“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
Last Updated: May 13, 2009 03:59 EDT
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