Dollar May Extend Gain as Haven on Bets Stimulus to Fall Short

By Yasuhiko Seki and Ron Harui

Feb. 13 (Bloomberg) -- The dollar may rise for a fourth day against the euro, the longest gain in four months, on speculation U.S. plans to end the recession will fall short, spurring demand for the greenback as haven.

The euro fell yesterday to the lowest level versus the dollar in more than a week as industrial output in the 16 countries sharing the currency dropped in December by the most on record, giving the European Central Bank more room to cut interest rates. The Group of Seven major industrial nations may discuss exchange rates during a meeting that starts today.

“Risk-aversion will not fade unless we know more concrete details of the U.S. plans,” said Seiya Nakajima, chief economist at Japanese trading house Itochu Corp. in Tokyo. “This will keep interest in safe havens alive.”

The dollar traded at $1.2866 per euro at 8:44 a.m. in Tokyo from $1.2861 late in New York yesterday, when the greenback touched $1.2722, the strongest level since Feb. 2. The yen traded at 116.67 per euro from 116.95 late in New York yesterday. The U.S. currency traded at 90.82 yen from 90.94 yen.

Traders may have bought the euro at about $1.27 to keep it from falling below that level so they can profit from an options contract that expires today, said Scott Ainsbury, a portfolio manager who helps manage about $12 billion in currencies at New York-based hedge fund FX Concepts Inc.

“The bottom side, the $1.27, is acting as a magnet,” Ainsbury said of the euro versus the dollar. “It has just been held up almost artificially.” The euro hasn’t fallen below $1.27 since Dec. 5. An option grants an investor the right, not the obligation, to buy or sell the underlying security at a pre- determined date.

Weaker Sterling

Sterling fell 1.3 percent to $1.4218 and 0.6 percent to 90.18 pence per euro yesterday as the spread between two- and 10- year government debt reached the widest since at least 1992. Bank of England Governor Mervyn King said on Feb. 11 the U.K. is in a “deep recession” that may prompt policy makers to keep cutting the main rate, now at 1 percent, and pump money into the economy.

The yen advanced 1.5 percent to 13.1741 versus the Norwegian krone and 1 percent to 129.02 versus the pound yesterday on speculation the global drop in stocks will encourage investors to sell higher-yielding assets and pay back low-cost loans in Japan. Japan’s 0.1 percent target lending rate compares with 1 percent in Great Britain and 2.5 percent in Norway.

The South African rand depreciated 3 percent to 10.1096 per dollar on speculation the country’s credit rating may be downgraded as the government plans to more than double its fiscal deficit because of slowing economic growth.

G-7 Meeting

The G-7 plans to discuss exchange-rate developments at a meeting in Rome today and tomorrow, a U.S. Treasury official on Feb. 11. told reporters in Washington on condition of anonymity, declining to discuss specific currencies.

Treasury Secretary Timothy Geithner, speaking on Feb. 11 before the Senate Budget Committee, defended his strategy of taking time to work out the details of a plan to shore up the financial industry.

“I completely understand the desire for details and commitments,” he said. “But we’re going to do this carefully.”

A U.S. economic stimulus bill was headed for passage in Congress by the end of this week after lawmakers agreed on a $789 billion plan that aims to stem the recession through a mix of government spending and tax cuts.

“All the stimulus in the world is not going to arrest the economic downturn unless we have some sort of stabilization in the banking system,” said Omer Esiner, a senior analyst in Washington at Ruesch International Inc., a currency trading company. “That’s helping safe-haven assets.”

European Output

The euro weakened yesterday as much as 1.4 percent against the dollar after the European Union’s statistics office said in Luxembourg that industrial output fell 12 percent from a year earlier. The decline was larger than the 9.5 percent drop forecast by economists in a Bloomberg survey and the biggest since the data series began in 1986.

The ECB cut its inflation outlook in 2010 to 1.6 percent from 2 percent, stoking speculation policy makers will lower its main refinancing rate to a record. The bank also reduced its 2010 growth outlook to 0.6 percent from 1.4 percent.

Investors added to bets the ECB will reduce the 2 percent rate at its March 5 meeting, with the yield on the three-month Euribor interest rate futures contract due in March falling to 1.70 percent yesterday.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.