Dollar Gains Against Euro as Stock Declines Spur Safety Bid

By Andrew MacAskill and Ye Xie

Nov. 28 (Bloomberg) -- The dollar rose against the euro, trimming its biggest weekly decline since September, as stocks fell, prompting investors to take refuge in U.S. Treasuries.

The dollar also advanced versus the Japanese yen, South African rand and Swedish krona as European shares dropped for the first time in five days and U.S. stock futures pointed to a lower opening. The euro weakened against the yen and the pound as investors added to bets the European Central Bank will cut interest rates next week after inflation slowed by the most since at least 1991.

“The momentum in equities has faded and so people are turning to the safety of the dollar,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. “The recent return of risk appetite is likely to prove short lived because the economic problems aren’t over.”

The dollar strengthened 1.3 percent to $1.2734 per euro at 8:26 a.m. in New York, from $1.2904 yesterday. It’s down 1.1 percent from Nov. 21, the biggest weekly drop since Sept. 19. The dollar gained 0.3 percent to 95.46 yen, from 95.19 yesterday, and has declined 0.6 percent this week. The euro weakened to 121.57 yen, from 122.89 yesterday, trimming a weekly gain to 0.7 percent this week.

The Dow Jones Stoxx 600 Index declined 1.2 percent and futures on the Standard & Poor’s 500 Index dropped 0.7 percent, increasing the attractiveness of dollar-based assets as a haven. Treasuries rose today, heading for their biggest monthly gain since 1981, with the yield on the 10-year note falling three basis points to 2.94 percent. That’s three basis points short of the record low 2.91 percent reached this week.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose 1.1 percent to 86.437. The index climbed to 88.463 on Nov. 21, the highest since April 2006.

India’s rupee fell the most in two weeks, losing 1.4 percent to 50.1075 per dollar, after terrorist attacks across Mumbai left at least 120 people dead. Authorities closed stock, bond, commodity and currency markets yesterday. The Thai baht declined for a third day, reaching 35.53, the lowest level since February 2007, as protesters occupied Bangkok’s international airport for a fourth day.

The rupee, the third-worst performer among Asia’s 10 most- active currencies outside Japan, according to data compiled by Bloomberg, may not fall further as a consequence of the terrorist attacks, Gerry Celaya, chief strategist at RedTower Inc. in Aberdeen, Scotland said in a Bloomberg Television interview.

‘Tragic Events’

“It is a separate matter, basically the markets are getting used to these tragic events since 9/11,” Celaya said. “Investors are used to taking a long-term view now. They look at these tragic events as leading to periods of reflection. People will think about it and taking a five or 10 year view, then you have to make decisions based on that.”

The euro extended declines against the dollar and the yen after the European Union statistics office in Luxembourg said inflation in the region slowed to 2.1 percent in November from 3.2 percent in October. A separate report showed unemployment in the region rose to 7.7 percent in October from 7.6 percent in September, the highest level since January 2007.

“Some of the shine has come off the euro since that data came out,” said Neil Jones, head of hedge-fund sales in London at Mizuho Capital Markets. “It shows Europe is still inheriting the whole credit slowdown. The ECB’s now talking about aggressive interest-rate cuts and that’s going to weigh on the currency.”

Rescue Packages

Investors added to bets the ECB will cut its main refinancing rate at least 75 basis points by March from 3.25 percent. The implied yield on three-month Euribor futures contracts expiring in March fell 7 basis points to 2.61 percent today. The yield was 16 basis points above the ECB’s benchmark, which is at 3.25 percent, in the past year. The central bank lowered its key rate by 100 basis points since Oct. 8, to 3.25 percent. Policy makers next meet on Dec. 4.

The dollar was poised for a third monthly decline against the yen and its first monthly loss versus the euro since June, on speculation policy makers’ steps to spur growth and lending reduced demand for the relative safety of U.S. assets.

The Federal Reseve said on Nov. 25 it will assign $800 billion in new funding to bolster credit flows to homebuyers, consumers and small businesses and will take on credit risk by buying debt. The European Union proposed a package for its 27 member countries on Nov. 26 after data this month showed the euro region fell into a recession in the third quarter for the first time since the introduction of the euro in 1999.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net