Dollar Declines as Stocks Advance, Driving Higher-Yield Demand

• By Bo Nielsen

Nov. 4 (Bloomberg) -- The dollar and the yen fell as improved bank earnings drove gains in stocks and speculation faded the Federal Reserve will signal it’s closer to raising interest rates, fueling demand for higher-yielding currencies.

The yen fell against all 16 most-traded currencies tracked by Bloomberg as the MSCI World Index advanced after Societe Generale SA posted third-quarter profit that beat analysts’ estimates. The Dollar Index slid for the second time in three days on expectations the Fed will today repeat its pledge to keep interest rates at a record low for an “extended period.”

“People were worried about the Fed withdrawing monetary stimulus too soon but over the last 48 hours they have realized there won’t be any material change,” said Paul Robson, a London-based senior currency strategist at Royal Bank of Scotland Group Plc. “It’s too early to square up risky positions and dollar selling will return.”

The dollar weakened to $1.4770 per euro as of 7:12 a.m. in New York, from $1.4724 yesterday. The yen depreciated to 134.17 per euro, from 133.01, and to 90.85 per dollar, from 90.33.

The MSCI World Index climbed 0.6 percent. The Standard & Poor’s 500 Index futures also advanced 0.6 percent. The declines in the dollar against the euro will accelerate if it depreciates past $1.48, Robson said. The currency will mostly trade weaker than $1.50 in the next six months, he said. The Dollar Index, which tracks the currency against those of six major U.S. trading partners, fell 0.4 percent.

‘Improved’ Risk Appetite

“Risk appetite improved markedly,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a note today. It’s “largely due to the fact that stocks have made positive returns.”

Societe Generale, France’s second-biggest bank, said today net income doubled to 426 million euros ($627 million), against the 399 million-euro median estimate of 11 analysts surveyed by Bloomberg. Australia’s Westpac Banking Corp. reported second- half profits of A$2.33 billion ($2.1 billion), more than analyst expectations of A$2.23 billion.

The Fed is likely to retain its reference to keeping interest rates at a record low for an “extended period” in its monetary policy statement today, according to Citigroup Inc. Policy makers will hold the benchmark interest rate target in a range between zero and 0.25 percent, according to the median estimate of economists in a Bloomberg survey. The European Central Bank and Bank of England make policy decisions tomorrow.

Payrolls Report

“All central banks have sounded more dovish than expected over the past week, and the Fed is similarly likely to retain its current statement,” Michael Hart, a London-based currency analyst with Citigroup, wrote in a note today. “Market implications are ambiguous though and the dollar is more likely to be driven by the next payrolls release.”

A Labor Department report on Nov. 6 may show the pace of job losses fell in October, while the jobless rate rose to 9.9 percent, from 9.8 percent a month earlier, Bloomberg surveys of economists showed.

The euro rose against the dollar after London-based Markit Economics said an index of Europe’s services and manufacturing industries rose for a third month in October as evidence mounted that the global economy is pulling out of the recession. Service industries in the U.S. probably expanded in October for a second month, a private survey may show today.

“With the Fed, the ECB and the BOE expected to maintain a rather dovish tone in their statements this week, market concerns about an early start of central banks’ exit strategies should calm down,” Antje Praefcke, a currency analyst with Commerzbank AG in Frankfurt, wrote today. “In this situation, risk perception should ease.”

Rand Gains Most

South Africa’s rand was the best performer among the most- traded currencies, rising 1.9 percent to 11.74 yen, and 1.3 percent to 7.7396 per dollar.

Reserve Bank Deputy Governor Daniel Mminele said policy makers will continue accumulating reserves without intervening in the foreign-exchange market, according to a copy of a speech posted on the bank’s Web site yesterday.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: November 4, 2009 07:17 EST