Dollar Falls as Signs of Global Recovery Spur Demand for Yield

By Matt Townsend and Anchalee Worrachate

Sept. 22 (Bloomberg) -- The dollar weakened for the first time in three days against the euro, falling to the lowest level in a year as evidence the global economy is recovering spurred investors to buy higher-yielding assets.

The U.S. currency declined the most versus the New Zealand and Australian dollars among major counterparts after the Asian Development Bank said the region’s economies will expand this year faster than initially forecast. New Zealand’s dollar climbed to the highest versus the yen in more than 11 months as the nation’s current-account deficit shrank.

“In terms of economic recovery, capital will move away from the U.S. to those regions which offer better opportunities,” said Thanos Papasavvas, who helps oversee $4 billion as head of currency management at Investec Asset Management Ltd. in London. “The dollar was the safe haven of 2008, and a lot of the reversal we’re seeing means money can be put back to work.”

The dollar slid 0.8 percent to $1.4793 per euro at 9:36 a.m. in New York, from $1.4680 yesterday, after depreciating to $1.4821, the weakest level since Sept. 23, 2008. It declined 1 percent to 91.05 yen, from 91.93, and lost 0.7 percent to $1.6338 per pound, from $1.6217. The yen traded at 134.82 per euro, compared with 134.96.

New Zealand’s dollar rose 1.4 percent to 65.92 yen, after climbing to 66.06, the highest level since Oct. 7. The kiwi increased as much as 2.5 percent to 72.44 U.S. cents, the strongest level since August 2008. Australia’s dollar advanced 1.3 percent to 87.44 U.S. cents.

Asian Currencies 

Most major Asian currencies gained after the Asian Development Bank said in a report that the region’s economies, excluding Japan, will grow 3.9 percent in 2009, faster than a March estimate of 3.4 percent. Growth may accelerate in 2010 to 6.4 percent, the bank said.

The Singapore dollar advanced 0.5 percent to S$1.4112 versus the dollar, while India’s rupee appreciated 0.4 percent to 47.9625. The South Korean won was little changed at 1,203.75.

Stocks rose in Europe and Asia, reducing demand for the dollar as a refuge. The MSCI World Index of 23 developed nations added 0.9 percent to 1,140.75. The Standard & Poor’s 500 Index advanced 0.5 percent.
The VIX, a measure of stock-market volatility known as Wall Street’s fear gauge, dropped 40 percent since the start of the year. The lower the index, the more inclined investors are to buy so-called risk assets such as stocks, commodities and higher-yielding currencies.

G-20 Meeting 

The dollar also weakened on speculation Group of 20 leaders, meeting in Pittsburgh on Sept. 24-25, will call for a reduction in global trade imbalances that may cause further gains in currencies against the dollar.
Policy makers need to promote a “sustained growth track and facilitate global adjustment, as well as structural reform which will need to be undertaken in both deficit and surplus countries,” Dimitri Soudas, a spokesman for Canadian Prime Minister Stephen Harper, told reporters yesterday in Ottawa.

“There’s talk that world leaders may seek to address the U.S. imbalances,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “This may lead to weakness in the dollar.”

The U.S. trade deficit widened in July and imports gained by a record 4.7 percent, the Commerce Department said in Washington on Sept. 10. The gap between imports and exports increased 16 percent, the most in more than a decade.

Dollar Index 

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and the yen, fell 0.8 percent to 76.168, snapping gains at two days.

The Federal Reserve will keep its target rate for overnight bank loans at a range of zero to 0.25 percent at its two-day policy meeting starting today, according to all 93 economists surveyed by Bloomberg News. Chairman Ben S. Bernanke and his colleagues may discuss how to wind down purchases of mortgage- backed securities.

“We wait to see how much the Fed acknowledges the improvement in the data recently,” said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world’s largest foreign-exchange trader. “The risk is that dollar short positions get taken off prior to that event.” A short position is a bet an asset will decline.
New Zealand’s dollar rose for a second day versus the yen after Statistics New Zealand said the current-account deficit shrank to NZ$10.61 billion ($7.57 billion) in the 12 months ended June 30, from NZ$14.57 billion in the year through March. The median estimate in a Bloomberg survey was for a NZ$13.3 billion deficit.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Anchalee Worrachate at aworrachate@worrachate@bloomberg.net
Last Updated: September 22, 2009 09:37 EDT