Dollar Rises to Four-Week High as Financial Loss Concern Eases

By Ye Xie and Kim-Mai Cutler

July 23 (Bloomberg) -- The dollar rose to a four-week high against the yen and advanced versus the euro as concern eased that losses at financial firms may prolong the U.S. economic slowdown and oil prices fell.

The currency also gained as signs of stability in the financial sector fueled bets that the Federal Reserve will raise interest rates in September. The yen fell to a record low against the euro as stocks climbed, encouraging investors to add to holdings of higher-yielding assets funded in Japan.

``The view that the worst of the uncertainty and bad news may be behind us has reinvigorated risk appetite,'' said Derek Halpenny, head of currency research in London at Bank of Tokyo- Mitsubishi. ``We're on the last leg of the dollar bear market.''

The dollar rose 0.5 percent to 107.82 yen at 8:47 a.m. in New York, from 107.33 yesterday. It touched 107.92, the highest since June 26. The U.S. currency appreciated 0.2 percent to $1.5746 per euro, from $1.5783. The euro may peak at about $1.62 before falling to $1.48 in a year, Halpenny said. The yen dropped 0.2 percent to 169.80 per euro, from 169.43 yesterday. It touched 169.96, the weakest since the euro's 1999 debut.

Futures traded on the Chicago Board of Trade showed a 55 percent chance the Fed will increase its 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by Sept. 16, up from 49 percent odds yesterday. Policy makers next meet Aug. 5.

The Chinese yuan fell 0.1 percent to 6.8298 versus the dollar. China will slow the local currency's gains to about 3 percent in the second half of the year to help exporters weather a decline in global demand and rising costs, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences in Beijing.

Weaker Yen

The yen dropped 0.9 percent against the pound and 0.4 percent versus the Brazilian real as an advance in global stocks encouraged carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.5 percent compares with 5 percent in the U.K. and 12.25 percent in Brazil.

``With the markets calming down, shown by the rally in stocks, the yen is becoming particularly weak among major currencies,'' said Shigetake Nakayama, a manager on the proprietary-trading desk in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second-largest financial group. ``With rates still low, there is no reason to buy the yen.''

The euro extended its decline versus the dollar as a report showed industrial orders in the euro region fell in May more than twice as much as forecast. Orders dropped 3.5 percent from April, the European Union statistics office in Luxembourg said today, compared with a 1.3 percent decline predicted by economists in a Bloomberg survey.

Treasury Note

The yield on the U.S. two-year Treasury note increased 7 basis points, or 0.07 percentage point, to 2.78 percent. The yield advantage of the comparable-maturity German bund decreased to 181 basis points, the narrowest since July 11, making the U.S. securities more attractive.

The dollar rose the most against the euro in more than two weeks yesterday after Treasury Secretary Henry Paulson said a strong dollar is ``really very important'' and Congress will likely pass a plan to support Fannie Mae and Freddie Mac. Philadelphia Fed President Charles Plosser said interest rates should be raised.

The U.S. currency touched a record low of $1.6038 per euro on July 15 as traders speculated the two companies, which own or guarantee almost half of the $12 trillion in outstanding U.S. home loans, would be forced to seek a bailout.

Overseas Purchases

Overseas investors' net purchases of Fannie Mae, Freddie Mac and other so-called agency debt were $24.2 billion in May the Treasury Department said on July 16. That compares with the $67 billion foreign investors spent on U.S. stocks, notes and bonds that month, Treasury data show.

``Paulson is trying to prevent further declines in dollar assets given that foreign investors' purchases of agency bonds are one source of funding for the U.S. current-account deficit,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote today in a research note.

The current account is the broadest measure of trade. An economy with a deficit relies on overseas investment to make up for its own savings shortfall.

The Fed will issue its Beige Book report, a survey of regional economic performance, at 2 p.m. today in Washington. Economic growth was ``generally weak'' in April and May as consumer spending slowed, the Fed said in its June 11 report.

``The Beige Book will hold a bearish tone on the economy while mentioning rising inflationary pressure,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd. ``We don't expect any rate hike by the Fed this year. With the markets still pricing in a rate hike, this will push down the dollar,'' to 103 yen by year-end, he said.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.