Dollar Rises From Near Two-Month Low as U.S. Economy Accelerates

By Allison Bennett - Jan 28, 2011 11:05 PM GMT+0800

The dollar advanced against the euro for the first time in nine days after a government report showed U.S. economic growth accelerated in the fourth quarter, driven by consumer spending.

The greenback fluctuated earlier at almost a two-month low as Moody’s Investors Service said it may need to place a “negative” outlook on the U.S. debt rating sooner than anticipated. The yen rose against all its major counterparts on speculation yesterday’s drop after the downgrade of Japan by Standard & Poor’s would be hard to sustain.

“The underlying pace of expansion in the U.S. will be very reassuring to markets,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “We have seen some material gains in the euro against the dollar in the past few sessions, but we are likely to see a small retracement here going into the weekend.”

The dollar appreciated 0.2 percent to $1.704 versus the euro at 10:01 a.m. in New York, from $1.3734 yesterday, when it touched $1.3758, the weakest level since Nov. 22. The U.S. currency dropped 0.8 percent to 82.25 yen, from 82.92 yen. The euro fell 1 percent to 112.74 yen, from 113.89 yen.

The U.S. economy grew at a 3.2 percent annual rate in the three months ended Dec. 31, compared with a 2.6 percent pace in the third quarter, the Commerce Department reported. The acceleration was driven by the biggest gain in consumer spending in more than four years.

Consumer Sentiment

The Thomson Reuters/University of Michigan’s final consumer confidence index for January dropped to 74.2 from 74.5 a month earlier. The median forecast of 67 economists in a Bloomberg News survey was for a decrease to 73.3

The yen declined yesterday to a two-month low against the euro after Standard & Poor’slowered Japan’s credit rating one step to AA-.

The seven-day relative strength index of the yen versus its European counterpart rose above 30 for the first time in seven days. Readings below that level indicate a currency’s decline may be difficult to sustain.

Moody’s said it may need to place a negative outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.

“The probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer at Moody’s in New York.

The dollar has slid 2.3 percent against the euro in January, 3.7 percent versus the Swedish krona and 1.9 percent against the pound.

Aussie Versus Yen

The Australian dollar fell for the first time in three days against the yen on speculation the central bank will slow the pace of interest-rate increases to help the nation recover from months of flooding. Prime Minister Julia Gillard announced yesterday a one-off levy to help pay for reconstruction.

“The market’s been long Aussie for so long and we’ve got to expect more flood-related bad news so Aussie’s going to underperform for a while longer,” said Paul Bednarczyk, a strategist inLondon at 4Cast Ltd., a research company that counts central banks among its subscribers.

The Aussie slipped 0.4 percent to 81.94 yen, extending its drop so far this year to 1.3 percent.

To contact the reporter on this story: Allison Bennett in New York atabennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net