Dollar Falls Versus Euro as Central Banks Announce Joint Action

By Ye Xie and Bo Nielsen

Sept. 18 (Bloomberg) -- The dollar touched a two-week low versus the euro after the world's biggest central banks said they will act to revive financial markets, reducing demand for the greenback as a haven.

The yen dropped versus the New Zealand and Australian dollars as the Federal Reserve, Bank of Japan and European Central Bank joined global counterparts to reverse the seizure in credit markets, reviving demand for higher-yielding assets. The dollar remained lower versus the euro as oil rose and U.S. initial jobless claims unexpectedly increased.

``We're seeing reassertion of the weakness feature in the dollar as we get some breathing room,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``There are really two forces running against each other, repatriation flows and weak economic fundamentals in the U.S.''

The dollar dropped 0.3 percent to $1.4373 per euro at 10:10 a.m. in New York, from $1.4326 yesterday. It reached $1.4509, the weakest since Sept. 4. The yen depreciated 1 percent to 151.32 per euro, from 149.88. The dollar increased 0.6 percent to 105.27 yen, from 104.66 yesterday.

The Fed said in a statement on its Web site it authorized other central banks to auction $180 billion in dollar funds to financial institutions. The ECB will offer up to $40 billion for one day today and increase the amount of dollars provided to European banks in existing longer-term auctions, it said.

Treasury Demand

The dollar decreased 0.9 percent to 8.1870 rand and 0.6 percent to 6.6738 Swedish krona as investor demand for U.S. government debt waned. The yield on the two-year Treasury note rose 0.09 percentage point to 1.73 percent. The Standard & Poor's 500 Index climbed 1.3 percent.

The U.S. currency remained lower versus the euro as crude oil for October delivery advanced 4.3 percent to $101.38 a barrel and first-time claims for unemployment benefits rose last week. The euro-dollar exchange rate and oil had a correlation of 0.8 in the past year, according to Bloomberg calculations. A reading of 1 would mean they have moved in lockstep.

The yen weakened on speculation the central banks' action will lead investors to resume carry trades that take advantage of interest-rate differentials. Japan's currency fell 2.5 percent to 70.87 per New Zealand dollar and 2.2 percent to 84.54 against the Australian dollar.

`Risk Appetite'

``We're seeing a modest rebound in risk appetite,'' said Adam Cole, head of global currency strategy at RBC Capital Markets in London. The intervention ``signals that they will do what they can to help us through this situation,'' he said.

Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand. The Swiss National Bank held its benchmark rate at 2.75 percent today, matching the forecast of 19 economists surveyed by Bloomberg News.

The yen jumped 3 percent against the dollar on Sept. 15, the most in a decade, as Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, sparking a global stock- market rout. The U.S. government's $85 billion rescue of American International Group Inc. failed to calm investors.

``Intervention by central banks helps to reduce risk aversion and will weaken the yen in a knee-jerk reaction,'' said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London. ``But we still believe it will take more to turn this market around and are bullish on the yen.''

Overnight Libor

The overnight London interbank offered rate, or Libor, for dollars dropped 1.19 percentage points to 3.84 percent today, according to the British Bankers' Association. It reached 6.44 percent on Sept. 16, the highest since 2001.

Asian central banks are giving up efforts to stop their currencies from falling, allowing faster depreciation, as investors sell assets in those markets, according to HSBC Holdings Plc estimates and data compiled by Bloomberg. That's a change from two months ago, when the Bank of Korea sold a record $20.9 billion and the Reserve Bank of India's foreign-exchange reserves fell by $7.9 billion, London-based HSBC said.

The South Korean won has lost 3.3 percent against the dollar this month, while the Indian rupee is down 5.3 percent.

The number of Americans filing first-time claims for unemployment benefits increased to 455,000 in the week ended Sept. 13, from 445,000 in the previous week, the Labor Department said today. The median forecast of 38 economists surveyed by Bloomberg News was for a drop to 440,000.

The Conference Board's gauge fell 0.5 percent after a 0.7 percent decline the prior month, the New York-based private research group said today. The index points to the direction of the economy over the next three to six months. The Philadelphia's Fed factory index increased to 3.8 this month, from minus 12.7 in August.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net