Dollar Advances as Paulson Stresses Support for U.S. Currency

Dollar Advances as Paulson Stresses Support for U.S. Currency

July 22 (Bloomberg) -- The dollar rose the most against the euro in almost a week as Treasury Secretary Henry Paulson voiced support for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.

The greenback extended its gain after breaking $1.59, where orders to sell the euro were clustered, and increased further as crude oil prices fell, traders said. The Canadian dollar dropped against all of the other major currencies as a report showed domestic retail sales rose in May less than economists forecast.

``The feeling is that we're at a turning point and things are going to get better from here in the financial sector,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. Paulson's comments ``helped the market get over the mass hysteria about Fannie and Freddie.''

The dollar increased 0.4 percent to $1.5851 per euro at 10:28 a.m. in New York, from $1.5922 yesterday. It fell to $1.6038 on July 15, the weakest since the European currency's 1999 debut. The dollar advanced 0.4 percent to 106.86 yen, from 106.45. The yen was little changed at 169.40 per euro, compared with 169.48, after falling to a record of 169.91 yesterday.

South Africa's rand was the biggest gainer versus the dollar among the world's major currencies as gold prices increased and platinum advanced for the first time in seven days. South Africa produces about 10 percent of the world's gold and almost 80 percent of its platinum. The rand increased 0.4 percent to 7.5378 versus the dollar.

Canadian Dollar

Canada's dollar fell for the first time in three days against its U.S. counterpart, dropping 0.6 percent to C$1.0055 per U.S. dollar. Retail sales rose 0.4 percent in May to C$35.8 billion ($35.7 billion), Statistics Canada said today in Ottawa. The median forecast of 22 economists surveyed by Bloomberg News was for an increase of 0.6 percent.

The U.S. dollar strengthened today as Paulson said in a speech in New York that he's ``confident'' that lawmakers will pass the bill to ``boost confidence'' in Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing. He reiterated that a strong dollar is ``really very important.''

The dollar touched the record low earlier this month on concern Fannie and Freddie, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, may fail to survive the housing slump.

Plosser on Rates

Philadelphia Fed President Charles Plosser said in a speech today in King of Prussia, Pennsylvania, that the U.S. central bank should raise interest rates ``sooner rather than later.'' He argued against reductions in two Fed decisions this year.

Two-year U.S. Treasury yields rose 7 basis points, or 0.07 percentage point, to 2.66 percent. The yield advantage of comparable-maturity German bunds narrowed to 191 basis points.

``Plosser's hawkish comments pushed Treasury yields higher,'' contributing to the dollar's turnaround, said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

Futures traded on the Chicago Board of Trade showed a 7 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by a quarter-percentage point at its Aug. 5 meeting, compared with 40 percent odds a month ago.

The euro traded earlier near an all-time high versus the dollar as the Italian daily La Stampa reported that European Central Bank executive board member Lorenzo Bini Smaghi said the bank's main refinancing rate isn't ``exactly restrictive'' at 4.25 percent.

`Hawkish Noises'

``The ECB has continued to make hawkish noises, meaning the euro is going to be quite well-supported in the near term,'' said Ian Stannard, a London-based senior currency strategist at BNP Paribas SA. The dollar may still rebound to $1.50 by the end of the quarter, he said.

The euro may climb past 170 to an all-time high against the yen as the ECB raises rates a second time this year while the Bank of Japan leaves its benchmark rate unchanged at 0.5 percent, according to Commerzbank AG.

``The Japanese yen has to bear the consequences from having been unable to benefit from falling equity markets over the last weeks,'' currency strategists at the firm led by Frankfurt-based Ulrich Leuchtmann wrote in a note to clients. ``On the backdrop of low key rates, which are unlikely to see any changes in the near future, the general environment will remain difficult for the Japanese currency.''

fOREX NEWS

Dollar Is Little Changed After Bank of America Beats Forecasts

July 21 (Bloomberg) -- The dollar was little changed against the yen after Bank of America Corp. said profit declined less than analysts estimated.

The yen touched the all-time low against the euro as the largest U.S. consumer and home lender became the fourth of the nation's five biggest banks to post better-than-estimated results. The pound dropped versus the dollar and the euro as a report showed U.K. house prices fell in July for the first time since data began in 2002.

``The world looks a little more peaceful for the time being,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``But longer-term concerns about the U.S. economy haven't diminished.''

The dollar traded at 106.96 yen at 10:06 a.m. in New York, unchanged from July 18. The U.S. currency was at $1.5850 per euro, compared with $1.5847. The yen traded at 169.54 per euro, compared with 169.49, and touched 169.91, the weakest level since the European currency debuted in 1999.

Bank of America's net income fell to $3.41 billion, or 72 cents a share, the Charlotte, North Carolina-based bank said today in a statement. The average estimate of 21 analysts surveyed by Bloomberg was 54 cents.

The bank added $2.2 billion to loan loss reserves. The world's biggest banks and brokerages have disclosed $447 billion of writedowns and losses because of a credit-market slump triggered by mortgage defaults.

JPMorgan & Chase Co., Citigroup Inc. and Wells Fargo & Co. reported second-quarter results last week that exceeded analysts' estimates.

Weaker Pound

The pound dropped for a second day, depreciating 0.3 percent to $1.9940 and 79.46 pence per euro. Rightmove Plc, Britain's most-used property Web site, reported that the average asking price for a home fell an annual 2 percent to 235,219 pounds ($469,544). Bank of England policy maker David Blanchflower told the Guardian newspaper that the British economy is entering a recession that may last more than a year and the bank must lower its 5 percent target lending rate.

``Given that the U.K. economy is going to grow below trend, why do we need tight policy in the U.K.?'' said Michael Metcalfe, head of macro strategy at State Street Global Markets in London. ``I would agree that the next move in U.K. rates will be downward and sterling will fall on the back of that.'' The pound may decline to $1.80 within a year, he said.

Australian Dollar

The Australian dollar rose as much as 0.7 percent to an eight-month high of 104.48 yen on speculation the nation will retain its interest-rate advantage over Japan. The difference in yield between two-year Australian and Japanese bonds widened to 5.85 percentage points, the most in a week. Australia's target lending rate of 7.25 percent compares with 0.5 percent in Japan.

South Korea's won dropped for a sixth day, decreasing 0.4 percent to 1,018.00 versus the dollar. A five-year rally in emerging-market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, according to DWS Investments and Morgan Stanley.

Futures on the Chicago Board of Trade showed an 8 percent chance the Federal Reserve will increase its 2 percent target rate for overnight lending between banks by a quarter-percentage point at its Aug. 5 meeting, compared with 12 percent odds a week ago.

``The Fed has simply not been in a position to raise interest rates and fight inflation, so people have been shunning the dollar,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp.

Stern on Rates

The U.S. central bank shouldn't wait for housing and financial markets to stabilize before raising rates, Minneapolis Fed President Gary Stern said in an interview July 18.

``We're pretty well-positioned for the downside risks we might encounter from here,'' he said. ``I worry a little bit more about the prospects for inflation.''

Sales of previously owned homes in the U.S. declined to a 4.94 million annual pace in June, from 4.99 million the prior month, according to the median forecast of 74 economists surveyed by Bloomberg News. The National Association of Realtors will release the report July 24.

A day later, the Commerce Department will say sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, a separate survey shows. Sales of existing and new homes are down 35 percent from their July 2005 peak.

Leading economic indicators dropped 0.1 percent in June after a revised 0.2 percent decline the prior month, the Conference Board reported today. The decrease matched the median forecast of 62 economists surveyed by Bloomberg News.

Currency trading volume today may be about 75 percent of normal levels because of a public holiday in Japan, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender.

Forex News

7/21/2008 3:00 PM: EUR/$..1.5888 $/JPY..106.73 GBP/$..1.9982 $/CHF..1.0209 AUD/$..0.9753 $/CAD..1.0010

FX Listless, Awaits Data by Korman Tam

The trading week kicked off to a quiet start with the Japanese market away on holiday and a dearth of fresh economic news for traders to digest. Moving the markets today was a better-than-forecast Q2 earnings report from Bank of America, which, combined with the earnings reports from last week, instills renewed confidence in the financial sector. Although earnings plunged by 41% to $0.72 per share, it exceeded consensus estimates for $0.53 per share, prompting currency traders to push the euro/yen pair to a new record high at 169.89.

The economic calendar from the US consists of the Richmond Fed survey, weekly jobless claims, June existing home sales, building permits, durable goods orders, July University of Michigan consumer confidence, and June home sales. The data will highlight the current hurdles impeding the economy with further declines expected in both the housing market and consumer sentiment. Fears of rapid deterioration in the financial sector have subsided somewhat following recent better-than-expected earnings reports from banks. Nonetheless, the Fed has revealed increased concern over the outlook of the economy, tempering market sentiment for an FOMC rate hike in the coming months.

Today Forex News

Dollar Weakens as Bernanke Cites Growth Risk, Inflation Danger

July 15 (Bloomberg) -- The dollar dropped against the euro as Federal Reserve Chairman Ben S. Bernanke told a Senate committee that growth and inflation risks have both increased.

The currency weakened the most against the yen since the March collapse of Bear Stearns Cos. as Bernanke said helping financial markets return to more normal functioning remains ``a top priority.'' The dollar earlier touched a record low versus the euro on concern confidence in Fannie Mae and Freddie Mac will diminish even after the U.S. government pledged support.

``It's hard to find anything dollar positive in the statement,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``Bernanke clearly acknowledged more growth risks than he anticipated a few weeks ago. The problem is coming from the financial sector.''

The dollar declined 0.4 percent to $1.5976 per euro at 10:25 a.m. in New York, from $1.5908 yesterday, and touched $1.6038, the weakest level since the 15-nation currency's debut in 1999. The U.S. currency fell 1.7 percent to 104.35 yen, from 106.14 yesterday. Japan's currency increased 1.3 percent to 166.74 per euro, from 168.89 yesterday, when it weakened to the all-time low of 169.75.

The U.S. currency has given up all the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he has ``no bias'' on future interest- rate moves.

The dollar strengthened 0.6 percent to $1.5706 per euro that week. It has since slumped almost 2 percent on concern Fannie Mae and Freddie Mac, which buy or finance almost half the $12 trillion of U.S. mortgages, will need a government rescue.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a fifth day on the ICE market, dropping as much as 0.8 percent to 71.314, the lowest level since April 23, from 71.915.

Dollar News

Gross Likes Dollar More Than Euro for 1st Time on EU

July 14 (Bloomberg) -- For three years euro bulls used the prospect of higher interest rates in Europe to justify the currency's 32 percent rally against the dollar. No more.

A growing number of the world's biggest investors say a slowdown in the region's economy may be more severe than in the U.S., forcing the European Central Bank to reverse this month's rate increase. By January, the euro will be lower against the dollar, yen and even the pound, according to the median estimate of strategists surveyed by Bloomberg. Bill Gross, manager of the world's biggest bond fund, turned bearish on the euro for the first time since the currency's inception in 1999.

``We might have hit a point where the euro doesn't have a lot to stand on,'' said Emanuele Ravano, co-head of European strategy in London for Gross's Pacific Investment Management Co., which runs the $129 billion Pimco Total Return Fund. ``The euro is ultimately very overvalued. It could be quite a bit lower at some point in time over the next couple of years.''

The euro fell as much as 1.7 percent to $1.5611 in the week following President Jean-Claude Trichet's comments on July 3 that he had ``no bias'' on further changes in borrowing costs after boosting the main refinancing rate to 4.25 percent from 4 percent. Before Trichet spoke the currency traded near a record high on speculation the ECB would signal more than one rate increase was needed to tame inflation. It fell 0.5 percent to $1.5857 as of noon in London today, from $1.5938 on July 11.

Hedge Funds Flee

As the odds that the ECB will lift rates dwindled, hedge funds sold the 15-nation common currency, according to Zurich- based UBS AG, the world's second-biggest currency trader behind Deutsche Bank AG in Frankfurt. New York-based Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, said it's ``increasingly confident'' the euro will fall.

``Capital flows look less supportive for the euro and, with the ECB out of the way, the interest-rate policy would also seem to support our view,'' Stephen Hull, a strategist for Lehman in London, wrote in a research note July 11.

The euro is 30 percent overvalued versus the dollar, based on purchasing power parity, according to Newport Beach, California-based Pimco. That's more than any other currency among the Group of 10 richest nations. Purchasing power parity accounts for differences in the exchange rates of national currencies.

``When a currency gets between 25 percent and 30 percent overvalued it tends'' to revert to the mean, said Ravano. The euro may drop to $1.535 from $1.5938 last week, he said.

Burger Test

The Economist's Big Mac Index, which compares prices for the McDonald's Corp. product globally, shows the hamburger is 22 percent more expensive in Europe than in the U.S.

``We're not far off the capitulation point for the euro,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon, the investment-banking unit of Credit Agricole SA, France's second-biggest bank. The euro will fall to $1.52 by the end of the third quarter and to $1.45 by April 2009, he said.

The European single currency's gain since December 2005 was spurred by eight increases in the ECB's key refinancing rate.

French President Nicolas Sarkozy complained that the currency's strength was harming the competitiveness of European exporters and risked damaging economic growth. Exports from Germany, Europe's largest economy, declined 3.2 percent in May, the most in almost four years, the Federal Statistics Office in Wiesbaden said July 9.

Gross domestic product in the 15 nations sharing the euro will slow to 1.4 percent in 2009, from 1.7 percent this year, according to the median forecast of 29 economists in a Bloomberg survey. The U.S. economy will grow 1.8 percent next year, from 1.5 percent this year, according to the median of 78 estimates.

`Sharp Slowing'

There are ``concrete signs of a sharp slowing of euro-zone growth,'' Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, wrote in a note dated July 11. Investors should sell the euro against the dollar, he said.

It may be too soon to bet against the euro because the U.S. economy is also slowing, according to Derek Halpenny, head of currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest bank by market value. The euro will rise to $1.62 by the end of the third quarter, before falling back to $1.58 in the final three months of the year, he said.

``We're bullish on the euro,'' Halpenny said. ``The real story over the next three months is going to be the obvious and continued downturn in the U.S. economy compared to Europe.''

The ECB will cut the key rate a quarter-percentage point to 4 percent by the end of June 2009, according to the median of 30 economists in a Bloomberg survey. The Federal Reserve has lowered its target rate for overnight loans seven times since September to 2 percent.

`Incredibly Bearish'

``The rally in the euro is over and we're now incredibly bearish on the currency given the outlook for Europe's economy,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, the most accurate foreign-exchange forecaster in a 2007 Bloomberg survey.

The euro will slide to $1.50 by the end of the third quarter and $1.45 by year-end, he said. Redeker is more bearish than most strategists. The common European currency will weaken 5.4 percent to $1.50 by year-end, and slip to $1.45 by mid-2009, according to the median of 37 analysts surveyed by Bloomberg.

``At current levels the euro is an awfully expensive currency,'' said Stephen Jen, chief currency strategist at Morgan Stanley in London and a former Fed economist. ``We see fair value for the currency at around $1.30.''

DOLLAR NEWS

Dollar Falls Versus Euro on Concern Financial Losses to Deepen

July 10 (Bloomberg) -- The dollar fell against the euro on concern losses at financial firms will deepen, prolonging the U.S. economic slowdown.

Treasury Secretary Henry Paulson said in prepared congressional testimony that he's been assured by the regulator for Fannie Mae and Freddie Mac that the two companies have enough capital. The pound dropped versus the dollar and the euro as the Bank of England left its benchmark lending rate unchanged, increasing the risk of a recession.

``The heightened state of uncertainty is putting the dollar on the defensive,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The overhanging concern about the financial sector is dogging the market here.''

The dollar dropped 0.3 percent to $1.5782 per euro at 10:28 a.m. in New York, from $1.5743 yesterday. The U.S. currency traded at 106.84 yen, compared with 106.76. The euro appreciated 0.3 percent to 168.60 yen, from 168.06.

South Korea's won gained for a fourth day on speculation the government is intervening to halt the currency's decline to curb inflation. The Finance Ministry reiterated today that the government will tackle risks stemming from higher oil costs. The won rose 0.2 percent to 1,002.97 per dollar.

The British pound decreased 0.5 percent to $1.9726 after the central bank kept its benchmark interest rate at 5 percent. Against the euro, sterling dropped 0.4 percent to 79.71 pence.

Weakened Dollar

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in its target lending rate to avert a recession. Futures contracts on the Chicago Board of Trade show 86 percent odds that policy makers will keep borrowing costs unchanged next month.

Fannie and Freddie tumbled to the lowest level in 17 years in New York trading after former St. Louis Fed President William Poole said in an interview today that chances are increasing that the U.S. may need to bail out the companies.

The dollar fell against the euro yesterday after Fannie, the biggest provider of financing for U.S. home loans, paid a record yield relative to Treasuries on the sale of $3 billion in notes.

``There's a mixture of risk, which seems to be based in the U.S. in the special areas of finance, Fannie Mae and Freddie Mac,'' said Peter Frank, a currency strategist in London at Societe Generale SA, France's second-biggest bank by market value. ``We may see the dollar weakening again against a broad cluster of currencies.''

French Output

The euro weakened against the dollar earlier after reports showed French and Italian industrial production dropped in May more than economists forecast, raising concern European economic growth is slowing.

Output at French factories and utilities fell 2.6 percent from the previous month, the biggest decline since October 2005 the Paris-based statistics office said today. Italian production declined 1.4 percent from April, almost three times the drop forecast by economists in a Bloomberg News survey.

The euro may rise to $1.5909 against the dollar should it stay above its five-day moving average, said Masashi Hashimoto, a senior currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd.

The average, currently $1.5715, will provide a level of so- called support for the euro, Tokyo-based Hashimoto said, citing technical charts traders use to predict price movements. The firm's target matches a two-month high set by the 15-nation currency on July 3. Support is an area at which buy orders may be clustered.

The Norwegian krone declined as much as 0.4 percent to 8.0833 per euro after a government report showed inflation accelerated in June less than economists forecast.

Dollar News

Dollar May Extend Gain on Bernanke's Comment, Crude Oil Decline

By Ye Xie and Candice Zachariahs

July 9 (Bloomberg) -- The dollar may rise against the euro for a second day after Federal Reserve Chairman Ben S. Bernanke said the central bank may extend its emergency-loan program for securities firms into next year and crude oil prices tumbled.

The U.S. currency advanced yesterday, erasing losses that came at the start of the week on concern Fannie Mae and Freddie Mac, the two largest mortgage finance companies, may need to raise additional capital.

``Bernanke is telling the market that the Fed will be there if there's any problem,'' said Joe Trevisani, chief market analyst in Saddle River, New Jersey, at FX Solutions LLC, a foreign-exchange brokerage. ``The Fed has calmed down the markets. If oil continues to come down, the dollar may strengthen further.''

Against the euro, the U.S. currency traded at $1.5665 at 6:37 a.m. in Tokyo, after rising 0.4 percent yesterday. The dollar traded at 107.43 yen, following a 0.3 percent increase. Japan's currency was at 168.30 per euro, after a 0.1 percent gain.

The dollar strengthened yesterday as Bernanke said in a speech in Arlington, Virginia, that the Fed is committed to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers'' beyond year-end.

``Markets are going through another bout of turbulence, and they're willing to act to counter those forces,'' said Samarjit Shankar, director of global strategy for the foreign-exchange group in Boston at Bank of New York Mellon, on Fed policy makers. ``That's where the support for the dollar is coming from.'' The firm is the world's largest custodial bank, with about $23 trillion in assets under administration.

Dollar's Decline

The Fed's Primary Dealer Credit Facility, which provides direct loans, and the Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, were created in March in response to the credit crisis. Both programs are aimed at the 20 primary dealers in U.S. government debt.

The dollar has fallen 11 percent against the euro since September, when the Fed made the first of seven reductions in the target lending rate, now 2 percent, to prevent the housing slump and credit losses from plunging the U.S. economy into a recession. The European Central Bank raised its main refinancing rate last week to a seven-year high of 4.25 percent.

Richmond Fed President Jeffrey Lacker told reporters in Washington yesterday that the weak dollar may fuel ``inflation pressures,'' echoing Bernanke's comments last month that policy makers are ``attentive'' to the effect of the dollar's decline. Lacker said in a speech yesterday that the central bank should consider raising interest rates to limit inflation as the threat of a steep economic slump begins to fade.

Crude Oil

Bernanke and U.S. Treasury Secretary Henry Paulson are scheduled to testify before Congress tomorrow.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, yesterday increased as much as 0.6 percent to 73.082, the highest level since June 24.

Crude oil for August delivery fell for a second day, dropping more than 3 percent to $135.90 yesterday. It reached a record high of $145.85 a barrel on July 3. The euro-dollar exchange rate and oil have moved in the same direction 90 percent of the time during the past year, according to Bloomberg calculations based on the correlation of their value changes.

China's yuan appreciated 0.2 percent to 6.8511 per dollar, near the strongest since a dollar link ended in July 2005, on speculation the government will allow faster gains in the currency to help curb inflation.

The U.S. currency fell 0.1 percent against the euro on July 7 as a report from Lehman Brothers Holdings Inc. said Fannie and Freddie may need to raise a total of $75 billion because of an accounting change. They have enough capital to survive the housing slump and meet new accounting rules, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, told Bloomberg Television yesterday.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Candice Zachariahs in New York at czachariahs1@bloomberg.net.

Last Updated: July 8, 2008 17:42 EDT