Dollar May Extend Advance on Demand for U.S. Debt's Safety

By Jamie McGee and Ye Xie

Nov. 19 (Bloomberg) -- The dollar may gain against the euro for a second day after reports showed prices paid to U.S. producers plunged and homebuilder confidence fell, increasing demand for the safety of government debt.

``The dollar continues to perform fairly well on bad news,'' said Mike Moran, a senior currency strategist at Standard Chartered in New York. ``We are having another bout of risk aversion.''

The dollar traded at $1.2618 per euro at 7 a.m. in Tokyo, after gaining 0.3 percent yesterday. The yen was at 97.02 against the dollar following a 0.6 percent decline. The euro traded at 122.47 yen after increasing 0.4 percent.

Japan's currency erased its gain versus the euro yesterday as the Standard & Poor's 500 Index ended the day up 1 percent. U.S. stocks touched their lowest closing levels since 2003 after the National Association of Home Builders/Wells Fargo index of builder confidence decreased to a reading of 9, the lowest level since record keeping began in 1985.

The Labor Department reported that prices paid to U.S. producers fell 2.8 percent in October, the most since records began in 1947, as the faltering global economy caused demand for commodities to dry up.

The ICE's Dollar Index, a gauge of the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden's krona, rose to 87.372 from 86.807 on Nov. 17. The index reached 88.147 on Nov. 13, the highest level since April 2006, as investors took refuge in U.S. assets.

`Bullish' on Dollar

``I am very, very bullish on the dollar,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``The main story that we are seeing at the moment is the high perception of risk, and that is leading to capital repatriation back into the U.S.''

International demand for U.S. financial assets rose more than economists forecast in September. Total net purchases of long-term equities, notes and bonds increased $66.2 billion from $21 billion in the previous month, the Treasury said yesterday.

China surpassed Japan to become the biggest foreign owner of Treasuries, holding close to $600 billion. The yuan was little changed at 6.83 per dollar.

The yield on the two-year Treasury note decreased six basis points, or 0.06 percentage point, to 1.13 percent, according to BGCantor Market Data. It touched 1.13 percent, the lowest level since June 2003. The 1.5 percent security due in October 2010 gained 3/32, or 94 cents per $1,000 face amount, to 100 22/32.

Israel's Shekel

Israel's shekel slid to 3.9885 per dollar yesterday, the weakest level since Dec. 18, on speculation policy makers will cut the 3 percent target lending rate as global financial turmoil imperils domestic economic growth.

``Interest-rate differentials will continue to narrow against the dollar,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``You are likely to see continued dollar strength.''

The Swiss franc decreased as much as 0.5 percent to 1.2046 per U.S. dollar, the lowest level since September 2007, and the Canadian dollar dropped 0.5 percent to C$1.2316.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

Last Updated: November 18, 2008 17:02 EST