Dollar, Yen Fall as U.S. Economy Shrinks Less Than Forecast

By Ye Xie and Sapna Maheshwari

July 31 (Bloomberg) -- The dollar and the yen declined versus the euro after a government report showed the U.S. economy shrank less than economists forecast, reducing the demand for the currencies as a refuge

The Swedish krona advanced against the euro to the strongest level since December after a government report showed the economic contraction in the Scandinavian country slowed in the second quarter. The U.S. currency headed for a fifth month of declines against the pound, its longest run in five years, after a U.K. survey showed consumer confidence held at the highest level since April 2008.

“There was no big surprise in the GDP number,” said Thanos Papasavvas, head of currency management in London at Investec Asset Management Ltd., who helps manage $4 billion in currency assets. “We are underweight the dollar. We think it will continue to weaken on a medium-term basis and we would be using any strength in the dollar as opportunities.”

The dollar fell 0.5 percent 1.4138 per euro as of 9:53 a.m. in New York, from $1.4075 yesterday, and was at 95.47 yen from 95.56 yen. The Japanese currency weakened to 135.01 per euro, from 134.49.

Gross domestic product contracted at a less-than-projected 1 percent annual rate after shrinking 6.4 percent in the prior three months, the most in 27 years, Commerce Department figures showed today in Washington. Inventories dropped at a record $141.1 billion annual pace, after a $113.9 billion decline.

‘Some Restraint’

“The inventories data shows stunning drawdowns in both Q1 and Q2,” wrote Alan Ruskin, head of international currency strategy in North America at RBS Securities Inc. in Greenwich, Connecticut. “This bodes very well for H2 GDP data since the change in the change of inventories should be very positive. Obviously there will be some restraint to this trade because of month-end flows, but I expect players will buy risk trades again early next week.”

The Swedish krona touched 10.3 per euro, the strongest since Dec. 1 after Statistics Sweden said the country’s gross domestic product contracted an annual, work-day adjusted 6.2 percent, from a decline of 6.5 percent in the previous quarter. The krona has gained 4.8 percent against the euro this month and 5.6 percent against the dollar. It is the second best performer among the 16 major currencies after the Canadian dollar, which rose 7.8 percent against the dollar in July.

The dollar traded at a more than one-week low against the pound after GfK NOP said today that an index of consumer sentiment in the U.K. was unchanged in July at minus 25. The reading is up from minus 39 a year earlier, adding to signs that the U.K.’s worst slump in a generation is easing.

The pound traded at $1.6494, from $1.6493, and was up 0.2 percent for the month.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.netSapna Maheshwari in New York at Smaheshwar11@bloomberg.net
Last Updated: July 31, 2009 09:56 EDT