Dollar Advances as Equities Drop, Short-Term Treasuries Rise

By Oliver Biggadike and Ruby Madren-Britton

Nov. 20 (Bloomberg) -- The dollar rose against all of its major counterparts and climbed for a second day against the euro as investors sold shares and bought short-term Treasuries to reduce the chance of losses before the end of the year.

The yen also advanced against the euro as stock indexes in the U.S., Germany and Japan dropped, discouraging demand for higher-yielding assets. The greenback headed for its fourth straight weekly loss versus the yen and traded at almost a six- week low on speculation the Federal Reserve will keep interest rates near zero to encourage economic growth.

“The market is reducing its exposure to risk and moving into U.S. Treasuries,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The dollar is benefiting.”

The dollar strengthened 0.5 percent to $1.4845 per euro at 10:57 a.m. in New York, from $1.4925 yesterday. It touched $1.4802, the weakest level since Nov. 4. The yen appreciated 0.5 percent to 132.08 per euro, from 132.79, and was headed for a 1.2 percent rally this week. The U.S. currency was little changed at 88.96 yen, compared with 88.97, after touching 88.64 yesterday, the lowest level since Oct. 9.

Sweden’s krona dropped 1.2 percent to 6.9767 per dollar and the New Zealand dollar fell 0.8 percent to 64.50 yen as the drop in stocks encouraged investors to reduce carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. Benchmark rates of zero to 0.25 percent in the U.S. and 0.1 percent in Japan make their currencies popular for funding such trades.

Drop in Equities

The Standard & Poor’s 500 Index fell 0.3 percent. The MSCI World Index of shares dropped 0.6 percent and headed for a weekly decline of 1.1 percent. The Nikkei 225 Stock Average slid 0.8 percent, capping its fourth straight weekly loss. The Dow Jones Stoxx 600 Index of European shares declined for a fourth straight day.

Treasury two-year note yields fell to the lowest level this year on concern the rally in riskier assets has outpaced growth prospects and as the Fed signaled interest rates will stay low.

Three-month bill rates turned negative yesterday for the first time since last year’s credit freeze as the 64 percent rally in the S&P 500 from a 12-year low in March pushed valuations to about 22 times its companies’ reported earnings, the highest level since 2002.

“If you’ve been long all these asset classes and all these things that have done well, performed well, it’s the end of the year,” said David Ader, the head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “You do not get fired at the end of a calendar year for booking some profits. Now is not the time when people are going to add to risk.”

Outlook for China

China’s yuan forwards were on course for their biggest weekly drop in 10 months on speculation Chinese officials will rebuff international calls for the currency to appreciate. China is “passive” on the value of the dollar, the central bank’s Governor Zhou Xiaochuan said at a forum in Beijing today, signaling policy makers aren’t yet prepared to loosen controls on the yuan.

U.S. President Barack Obama urged China during his visit there this week to allow the yuan to gain. His Chinese counterpart, Hu Jintao, made no mention of the currency’s link to the greenback in a joint briefing.

“Zhou’s words may indicate China won’t let the yuan float in the short term,” said Shi Lei, a Beijing-based financial market analyst at Bank of China Ltd.

Yen’s Gains

The yen also strengthened versus major counterparts including the euro after the Bank of Japan left its benchmark interest rate unchanged at the end of its policy meeting today. The bank raised its monthly assessment, saying the economy is picking up.

“The yen won’t materially sell off until we see a rise in U.S. interest rates,” Adam Cole, London-based global head of currency strategy at Royal Bank of Canada, said in a Bloomberg Television interview.

The chance of a June increase in the Fed’s target rate was 28 percent today, compared with 68 percent odds a month ago, according to interest-rate futures.

South Korea’s won weakened versus the dollar for a second day after Kim Jong Chang, governor of the Financial Supervisory Service, said late yesterday without elaborating that government agencies plan to hold talks on what can be done to address inflows financed with low-interest dollar loans.

“These measures are taken to prevent destabilizing effects of capital inflows, but should not be taken as capital controls,” said Mirza Baig, a currency strategist in Singapore at Deutsche Bank AG.

The South Korean financial regulator announced yesterday tightened rules on lenders’ foreign-currency funding. The measures, including limits on the amount of foreign-currency forward contracts banks sign with companies, aren’t aimed at affecting the “in and out” of overseas capital, Kim said.

The won declined 0.2 percent to 1,159.05 per dollar. It earlier touched 1,168.65, the weakest level since Nov. 9.

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: November 20, 2009 11:04 EST