By Stanley White and Ron Harui
Nov. 18 (Bloomberg) -- The dollar rose against the euro and the yen on speculation overseas investors bought more of the safest U.S. assets as the global economy entered a recession.
The Dollar Index, a measure of the greenback against a basket of currencies of six trading partners, approached a two- year high before the Treasury releases data today that will probably show investors almost doubled holdings of the nation's securities in September. The Australian dollar declined after the country's central bank said it favored lower borrowing costs.
``We've got this pervasive risk aversion, and we are seeing dollar assets as attractive in a world permeated by fear,'' said Adam Carr, senior economist at ICAP Australia Ltd. in Sydney. ``I'm bullish on the U.S. dollar.''
The dollar rose to $1.2628 against the euro as of 7:36 a.m. in London from $1.2650 late yesterday in New York. It climbed to 96.51 yen from 96.43 yen. The euro bought 121.89 yen from 121.99 yen. The pound was quoted at $1.5025 from $1.4989. The dollar may strengthen to $1.23 per euro and 105 yen by year-end, Carr forecast.
Overseas investors bought a net $27.2 billion of U.S. assets in September, from $14 billion in August, according to a Bloomberg News survey of economists. The Treasury will release the report at 9 a.m. today in Washington.
Dollar Index
The Treasury received investor bids for four-week bills totaling more than triple the $34 billion that were sold at its Nov. 12 auction. The four-week bills were sold at the lowest rate since they were first auctioned in 2001. At the previous auction on Nov. 4, the Treasury received bids for the bills equal to 2.7 times the amount sold.
The ICE's Dollar Index rose to 87.062 from 86.807 yesterday. The index reached 88.147 on Nov. 13, the highest level since April 2006. Financial markets may be under stress for months, U.S. Treasury Secretary Henry Paulson said at a conference yesterday in Washington, after a credit slump caused $966 billion in losses and writedowns since the start of 2007.
``We expect risk aversion and ongoing deleveraging to be positive for the dollar, particularly against currencies where the central bank has more room to cut, such as the euro,'' wrote currency strategists led by Zurich-based Mansoor Mohi-uddin at UBS AG, in a research note yesterday.
UBS forecasts the dollar may strengthen to $1.20 per euro in one month.
RBA Minutes
The Australian dollar fell 0.8 percent from late New York trading to 64.35 U.S. cents and slid 0.7 percent to 62.13 yen as prices of commodities the country exports fell. The Bloomberg UBS Constant Maturity Commodity Index of 26 raw materials such as oil and gold fell 1.5 percent to 911.95 yesterday, the lowest close since March 2006.
The Aussie, as the currency is known, extended declines after the Reserve Bank of Australian said its three-quarters of a percentage point cut to 5.25 percent on Nov. 4 would ``enable a further meaningful reduction in rates paid by borrowers,'' minutes of the meeting showed today.
``The RBA is likely to reduce rates further,'' said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's biggest bank. ``There's a downside risk for high-yielding currencies.''
The yen may strengthen to 110 per euro by year-end, he said.
Global Recession
The yen gained against the Aussie as the prospect of a global recession prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.
The MSCI Asia Pacific index of regional shares fell 3.4 percent after U.S. stocks tumbled yesterday, extending a two- week decline. The Federal Reserve Bank of New York said yesterday its general economic index fell this month to minus 25.4, the lowest level since records began in 2001. Readings below zero signal New York State manufacturing shrank.
Japan's economy entered a recession in the third quarter as corporate spending and export demand slumped, data showed yesterday. The 15 countries that share the euro are also in a recession, a report showed last week.
``We're not likely to see any good economic news for some time,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Stocks and commodities show we're in a recession. In this environment, the yen is likely to gain.''
The yen may rise to 121 per euro and 95.50 against the dollar today, he said.
Dollar Status
The yen's 16 percent appreciation against the dollar this year caused exporters including Toyota Motor Corp. to slash profit forecasts. Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The automaker will fire 3,000 workers by March.
The dollar should remain the world's reserve currency to limit market turmoil, Japanese Finance Minister Shoichi Nakagawa said in an interview with Bloomberg Television today in Tokyo.
The dollar may strengthen 12 percent against the yen by the end of June as the Fed may start raising interest rates earlier than Japan's central bank, Bank of America Corp. said. The BOJ will reduce its rate to 0.1 percent, the lowest since July 2006, at a Dec. 19 meeting, Bank of America forecast.
``When the panic of the financial crisis is over, market participants will probably look for an eventual Fed tightening to reverse excessive easing earlier than the Bank of Japan,'' said Tokyo-based Tomoko Fujii, head of Japan economics and strategy at Bank of America, in a telephone interview.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net
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