Dollar Rises as Eastern European Slump Spurs Demand for Haven

By Ye Xie

Feb. 25 (Bloomberg) -- The dollar gained against the euro, pound and Swedish krona on bets the slump in eastern Europe may deepen the recession in the 16 nations using the single currency, spurring demand for the greenback as a haven.

The yen slid to a three-month low against the dollar after a report showed Japan’s trade deficit increased to the widest since 1980, making the currency less attractive as a refuge from the financial crisis. The Polish zloty weakened against the euro after the central bank cut its main interest rate as the economy headed for its worst recession in almost a decade.

“People have positioned for further weakness in eastern Europe,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The ripple effect is likely to continue to weigh on the euro and the Swedish krona.”

The dollar gained 0.2 percent to $1.2826 per euro at 9:10 a.m. in New York, from $1.2846 yesterday. The yen declined 0.3 percent to 96.93 per dollar from 96.64, after earlier reaching 97.33, the weakest level since Nov. 25. The euro traded at 124.24 yen, compared with 124.14.

Poland’s zloty lost 0.4 percent to 4.6539 per euro after policy makers lowered the main interest rate by a quarter- percentage point to 4.25 percent. The currency lost 11 percent this year for the worst performance among 25 emerging-market currencies after the Hungarian forint.

The dollar appreciated 0.7 percent to $1.4379 against the pound and 0.6 percent to 8.8625 Swedish kronor as Ukraine’s credit rating was cut by two levels by Standard & Poor’s a day after Latvia’s debt was downgraded to junk. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of bank loans in central and eastern Europe.

Dollar Index

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, increased 0.3 percent to 87.150. It touched 88.254 on Feb. 18, the highest level since Nov. 21, when it reached a 2 1/2-year high.

Japan’s currency depreciated beyond 97 per dollar earlier today for the first time since November as the Finance Ministry said the trade deficit increased in January to 952.6 billion yen ($9.9 billion), the widest since 1980, the earliest year for which there’s comparable data.

“Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers,” Mansoor Mohi-Uddin, chief currency strategist in Zurich at UBS AG, the world’s second-largest foreign-exchange trader, wrote in a note to clients today.

The yen weakened 5 percent against the dollar since Feb. 16, when Japan said its gross domestic product shrank at an annual 12.7 percent pace in the last quarter, the most since the 1974 oil shock.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net