By Oliver Biggadike and Ruby Madren-Britton
Oct. 10 (Bloomberg) -- The dollar fell for the first time in three weeks against the euro as calls for a “strong” U.S. currency failed to reassure investors concerned the government and Federal Reserve will accept declines in the greenback.
Traders shifted funds to Australia’s dollar, making it the best performer this week among 16 major currencies. Lawrence Summers, head of President Barack Obama’s National Economic Council, said on Oct. 8 the U.S. is committed to a strong dollar, the same day European Central Bank President Jean-Claude Trichet said it’s “important” to keep supporting the policy.
“Officially they have to say something like that,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “As long as the Fed keeps the current policy, too much excess money will push the dollar lower.”
The dollar fell 1.1 percent to $1.4732 per euro yesterday in New York, from $1.4576 on Oct. 2, in the first weekly decline since its 1 percent slide in the five days ended Sept. 18. The U.S. currency was little changed at 89.78 yen, compared with 89.81, before the Bank of Japan’s meeting next week. The euro climbed 1 percent to 132.25 yen.
Summers, the White House economic adviser, reiterated the administration’s commitment to a strong dollar this week, citing recent comments by U.S. Treasury Secretary Timothy Geithner.
“He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said on Oct. 8 at a forum in New York organized by Bloomberg LP, the parent of Bloomberg News. “Any idea that nations can devalue their way to prosperity is one that economic experience very much belies.”
Geithner at G-7
Geithner said on Oct. 3 after a meeting of Group of Seven financial officials that “it is very important to the United States that we continue to have a strong dollar.” Trichet echoed Geithner in his Oct. 8 press conference following the decision to hold the ECB’s main refinancing rate at a record low of 1 percent, saying it’s “very important” for U.S. policy makers to support the dollar.
The six-currency Dollar Index fell 0.85 percent to 76.35 this week, the lowest level since August 2008, on concern the Treasury and Fed may permit a gradual weakening of the U.S. currency to support the nation’s economic recovery.
“Clearly the market is having some problems believing the U.S. authorities’ strong-dollar policy,” said Carl Hammer, a senior global analyst at SEB AB in Stockholm. “It’s obviously quite easy for the U.S. to be content with a weaker dollar in order to reflate the economy.”
Aussie’s Gain
The Australian dollar rose 4.4 percent to 90.36 U.S. cents in the biggest weekly gain since May after the Reserve Bank unexpectedly raised the overnight cash target by a quarter- percentage point to 3.25 percent on Oct. 6. A report two days later showed an unexpected drop in the unemployment rate in September, adding to speculation the central bank will widen the extra yield paid on short-term money market securities further.
The premium of the three-month London interbank offered rate for the Australian dollar compared with the U.S. widened 25 basis points, or 0.25 percentage point, to 338 basis points this week, according to the British Bankers’ Association. The difference is within 10 basis points of the widest this year.
An investor who borrowed dollars and then sold them to deposit the funds in Australia would have earned 4.4 percent this week, according to data compiled by Bloomberg.
The number of Australians employed jumped by 40,600 from August, the biggest gain in almost two years, cutting the jobless rate to 5.7 percent from 5.8 percent, statistics bureau data showed.
Dollar Pares Decline
The dollar trimmed its weekly decline after Fed Chairman Ben S. Bernanke said on Oct. 8 that policy makers are ready to increase borrowing costs once the economy improves. The central bank probably “learned its lesson” from keeping interest rates low for too long in 2003 and 2004, said Richard Franulovich of Westpac Banking Corp.
“They could, shockingly, go early,” said Franulovich, a senior currency strategist at Westpac in New York. “If they do, that’s great news for the dollar. The Fed’s been unfairly criticized as a source of dollar weakness.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.5 percent yesterday, erasing most of the previous day’s decline.
Sterling was the only loser versus the dollar this week among the 16 most-traded currencies. It fell 0.7 percent to $1.5842 in a fourth weekly drop on speculation the economy remains too weak for the Bank of England to consider raising borrowing costs and stop asset purchases.
The central bank maintained its main rate at a record low of 0.5 percent on Oct. 8 and said it would put its bond-purchase program under review.
The Bank of Japan was forecast by all of the 20 economists in a Bloomberg survey to hold its target lending rate at 0.1 percent at its meeting next week. In September, policy makers described the economy as “showing signs of recovery,” an upgrade from the “stopped worsening” assessment in the prior month.
To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net
Last Updated: October 10, 2009 00:01 EDT
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