Dollar Gains as Investors Seek Refuge After Australia GDP Data

By Theresa Barraclough and Ron Harui

March 4 (Bloomberg) -- The dollar rose to the highest level in more than three months against the euro after a government report showed Australia’s economy unexpectedly shrank last quarter, boosting demand for the U.S. currency as a refuge.

The greenback climbed versus 14 of the 16 most-active currencies, pushing the Dollar Index to the strongest since April 2006. The Australian dollar fell to a one-month low against the U.S. currency. South Korea’s won approached the weakest in 11 years on concern prolonged financial turmoil in global markets will undermine the nation’s ability to service its overseas debt.

“We’re going to go back to the theme of heightened risk aversion,” said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp. in Singapore. “This favors the dollar.”

The dollar climbed to $1.2487 per euro as of 1:29 p.m. in Tokyo from $1.2561 late in New York yesterday. It earlier reached $1.2457, the highest since Nov. 21. The greenback rose to 98.48 yen from 98.16 yen. The U.S. currency appreciated to $1.4019 per pound from $1.4050, and advanced to 1.1814 Swiss francs from 1.1760.

The yen strengthened to 122.96 per euro from 123.31. Japan’s currency climbed 0.6 percent to 62.25 against Australia’s dollar.

The Dollar Index, which the ICE uses to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose 0.6 to 89.417 as investors sought shelter in the world’s reserve currency.

‘Sobering’ GDP

Australia’s gross domestic product contracted 0.5 percent from the previous three months, the Bureau of Statistics said in Sydney, compared with economists’ estimates for 0.2 percent growth. The GDP figures are “sobering,” Treasurer Wayne Swan said today in Canberra after the data was released. The Reserve Bank of Australia kept the benchmark interest rate at 3.25 percent yesterday, after cutting it by four percentage points since September.

The U.S. currency advanced for a fourth day against the euro on speculation Dallas Fed President Richard Fisher and Atlanta Fed President Dennis Lockhart will today stress the need to increase financial assistance to the banking system.

Fed Chairman Ben S. Bernanke said yesterday in testimony prepared for the Senate Budget Committee that policy makers may have to expand aid to banks beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits.

‘Stronger Initiatives’

“Bernanke is telling the public that the Fed and the government will act to support the banking system, which is a support for the U.S. dollar,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Stronger initiatives by the U.S. will be the driving force of currency markets.”

Fisher speaks at 8 a.m. in Fort Worth, Texas and Atlanta, and Lockhart speaks at 12 p.m. in Miami, Florida.

Gains in the yen may be limited after an aide to Japan’s opposition leader was arrested in a funding probe, signaling further political turmoil in the nation.

The senior aide to Ichiro Ozawa, head of the Democratic Party of Japan, was arrested on suspicion of receiving illegal political donations from a construction company, local media reported yesterday. “I did absolutely nothing illegal,” Ozawa told reporters today in Tokyo, vowing to stay on as leader.

“There is still instability in Japanese politics,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG. “This may increase foreign investors’ negative perception of Japan. The yen is likely to be sold” to 98.70 against the dollar and 124 per euro today, he said.

Worst Month

Japan’s currency had its worst month in February since 1995 after a government report showed the world’s second-largest economy shrank the most since 1974 last quarter and Finance Minister Shoichi Nakagawa quit amid accusations he was drunk at a press conference, eroding confidence in the government.

Korea’s won dropped as much as 1.7 percent to 1,578.80 per dollar today, near the 1,596 reached on March 2 that was the weakest level since March 1998. It traded at 1,552.60 from 1,551.95 yesterday.

“We believe intervention may be needed as officials are worried that domestic confidence in the won is being increasingly undermined,” said Joseph Lau, an analyst with Credit Suisse Group AG.

To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.