Thursday, May 21, 2009

The Falling Dollar

The dollar fell to a four-month low against the euro and weakened versus the yen on speculation the U.S. government’s creditworthiness is deteriorating, sapping demand for the U.S. currency.

The yen advanced to a nine-week high versus the dollar after Japan’s Finance Minister Kaoru Yosano said the government isn’t planning to intervene in the currency market. The dollar headed for its biggest weekly loss in two months versus the euro after Standard & Poor’s yesterday cut its outlook on the U.K.’s AAA credit rating to “negative” from “stable,” raising concern the same may happen to the U.S. South Korea’s won led Asian currencies higher as regional shares gained.

“Dollar sentiment is particularly bad,” said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “A lot of Treasuries are held by foreign investors and any concern about the value of U.S. debt will have a massive impact” on the U.S. currency.

The dollar declined to $1.3930 per euro as of 12:45 p.m. in Tokyo, after dropping to $1.3955, the lowest since Jan. 5. The U.S. currency has slumped 3.2 percent this week, heading for the biggest loss since the five days to March 20.

The yen rose to 94.12 per dollar, after reaching 93.87, the strongest since March 19. The yen traded at 131.18 per euro from 131.15. The won gained 0.6 percent to 1,240.90 per dollar.

The dollar weakened versus 14 of the 16 most-traded currencies after U.S. Treasury yields yesterday rose the most in two weeks on concern the government will not be able to fund its fiscal spending.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a note today. “The first considerations will likely be hard currencies that are liquid. On these counts, the likes of the euro, yen, Australian dollar and Canadian dollar will win out.”

The cost to protect buyers of U.S. sovereign bonds for five-years climbed to a two-week high, indicating deteriorating investor perception of the nation’s credit quality. U.S. credit- default swaps rose to 37.745 yesterday, the highest since May 4, from 34 on May 20, according to CMA DataVision. The five-year CDS price for Japan fell to 50 from 50.06 on May 20.

The dollar touched a four-month low of 1.0895 Swiss francs from 1.0936. The U.S. currency fell to C$1.1335 from C$1.1374 yesterday, after reaching $1.1328, the weakest since Oct. 14.

The U.S. currency also fell for a fifth day versus the euro after Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. will “eventually” lose its AAA rating.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating-cut, Newport Beach, California-based Gross said in an interview yesterday on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

The pound traded at $1.5859 from $1.5844 yesterday. It earlier climbed to $1.5897, the highest level since Nov. 6. The currency slumped as much as 1.5 percent yesterday after S&P lowered its outlook on U.K.’s credit rating and said the nation faces a one in three chance of a rating cut.

Investors also sold the dollar after the failure of BankUnited Financial Corp. added to concern the banking system in the world’s biggest economy remains weak.

BankUnited was in an “unsafe condition” and the quality of its loan portfolio had deteriorated, the Office of Thrift Supervision, the lender’s main regulator, said yesterday. BankUnited joined 33 U.S. banks and at least five credit unions that have gone under since January.

The administration of President Barack Obama will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. The U.S. Treasury reported the first budget deficit for April in 26 years, recording a $20.9 billion shortfall.

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 0.3 percent to 80.327 after dropping to 80.21, the lowest since Dec. 29.

The yen headed for a thirdly weekly gain versus the greenback after Japan’s Finance Minister Yosano said the “government isn’t considering currency intervention at this point.” Policy makers haven’t fully analyzed why the yen is gaining, he said at a press conference today in Tokyo.

“We are seeing the appreciation of the yen, but mainly because of the negative views on the U.S. economy,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “It would be hard for the Japanese government to change the direction of the market because it’s more of a dollar-weakness issue rather than a yen-strength issue.”

The Bank of Japan kept its target lending rate at 0.1 percent at a policy meeting today and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

The Korean won headed for a weekly gain as overseas investors added to their holdings of the nation’s shares for a sixth straight day.

“The won’s attempt to break the 1,230 level is under way,” said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul, the nation’s biggest lender. “There has been a tug of war between importers and exporters, which will keep the currency in a relatively narrow range” between 1,230 and 1,260.

The currency rose 1.3 percent this week, taking its gain for the past three months to 21 percent, Asia’s best performer.

(from Bloomberg, May 21, 2009)

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