Dollar Weakens as Stock Gains Increase Demand for Higher Yields

By Yasuhiko Seki

May 29 (Bloomberg) -- The dollar fell, heading for the biggest monthly drop this year against the euro, on speculation gains in stocks spurred demand for higher-yielding assets.

The dollar also weakened versus 14 of the 16 most-traded currencies after South Korea said its national pension fund plans to hold fewer U.S. Treasuries relative to other assets. The yen advanced against the dollar after a Japanese report showed industrial production rose the most in 56 years, fueling optimism funds will flow back into the nation’s stocks. The Australian and New Zealand dollars advanced for a third month as rising commodity prices boosted demand for the currencies.


“Capital outflows from the dollar are now at work,” said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “As economic data at home and abroad now suggest the worst of the recession is over, risk appetite is improving.”

The dollar declined to $1.4005 per euro as of 7:16 a.m. in London from $1.3941 in New York yesterday, heading for a 5.6 percent loss this month, the most since December. The U.S. currency dropped to 96.70 yen from 96.85. The yen slid to 135.43 per euro from 135.04.

The MSCI Asia Pacific index of regional shares rose 0.9 percent today, extending this month’s gains to 14.8 percent.

Australia’s currency advanced to 79.26 U.S. cents from 78.40 cents yesterday, after reaching 79.28 cents, the strongest since Oct. 2. It has risen 9.2 percent this month, the most since 1985. New Zealand’s dollar climbed to 63.12 U.S. cents from 62.33 cents. It strengthened 10 percent this month.

Dollar Falls 

The dollar dropped for a second day versus the euro, losing 5.5 percent this month as the decision by South Korea’s pension fund renewed concerns that record U.S. debt sales will undermine the country’s creditworthiness.

“The report of the Korean pension fund’s plan to reduce its weighting of U.S. Treasuries triggered buying of the euro against the dollar,” said Takashi Kudo, director of foreign- exchange Sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “With the dollar still sensitive to speculation related to its debt, the market is waiting for the visit to China next week by U.S. Treasury Secretary Timothy Geithner for fresh trading leads.”

China is the biggest holder of U.S. government debt.
The euro also advanced versus the dollar as crude oil traded near a six-month high, adding to speculation the European Central Bank will avoid cutting interest rates so as to avoid stoking inflation.

‘Support the Euro’ 

“Rising crude oil prices give little reason for the ECB to take action on interest rates,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co. “The yield advantage will support the euro.” 

The ECB’s benchmark policy rate is 1 percent, compared with as low as zero in the U.S. and 0.1 percent in Japan. Crude oil rose as high as $65.44 a barrel in New York yesterday, the most since Nov. 5. Crude oil prices have doubled from their low of $32.40 on Dec. 19, 2008, heading for their biggest monthly gain since March 1999.

Japan’s Factory Production 

The yen was poised for a second monthly advance against the dollar after the Trade Ministry said factory production climbed 5.2 percent in April from March, when it rose 1.6 percent. The median estimate of 30 economists surveyed by Bloomberg News was for a 3.3 percent increase.

Bank of Japan Governor Masaaki Shirakawa said this week the world’s second-largest economy will grow this quarter after contracting a record 15.2 percent in the three months ended March 31.

“The better-than-expected output data seem to suggest the Japanese economy has bottomed out and may continue to surprise in coming months,” said Taro Saito, senior economist in Tokyo at NLI Research Institute Ltd., a unit of Japan’s biggest life insurer.

Still, the yen declined 2.0 percent against the dollar this week as optimism about a global recovery spurred Japan’s investors to look abroad for higher returns.

Japanese investors bought 641.1 billion yen ($6.61 billion) more overseas bonds and notes than they sold in the week ended May 23, the biggest net purchases in a month, according to the finance ministry.
“Japanese investors are now willing to take risks,” said Mizuho’s Suzuki said. “The yen is likely to be sandwiched by capital inflow into Japan and capital outflow from Japan.”

Editors: Nicholas Reynolds, Nate Hosoda.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
Last Updated: May 29, 2009 02:37 EDT