Dollar Rises to Highest Since 2006 as AIG Spurs Safety Demand

By Ye Xie and Kim-Mai Cutler

March 2 (Bloomberg) -- The dollar rose to the highest level since April 2006 against the currencies of six major U.S. trading partners as investors sought safety after American International Group Inc. got more U.S. government support.

The euro dropped for a second day versus the greenback as EU leaders vetoed Hungary’s proposal for 180 billion euros ($227 billion) of loans to former communist economies in eastern Europe. The Hungarian forint and Polish zloty slipped to the weakest in about a week against the dollar, while the Swedish krona fell to a record versus the euro.

“The dollar is the supreme currency,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “It’s a manifestation of fear. To break the downward spiral, we need to have a couple of weekends without another major blowup of a financial firm.”

The dollar increased 0.4 percent to $1.2620 at 8:45 a.m. in New York, from $1.2669 on Feb. 27. It reached $1.2546, the strongest level since Feb. 19. The euro dropped 0.6 percent to 122.82 yen from 123.61. The yen gained 0.2 percent to 97.34 per dollar from 97.57.

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, climbed to 88.956, the highest level since April 2006.

The U.S. currency strengthened as global equities slumped, with the MSCI World Index dropping 1.8 percent. AIG will get as much as $30 billion in new government capital in a revised bailout after posting the worst loss by a U.S. corporation.

Risk Aversion

“Risk aversion is re-emerging,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “Investors appear to be repatriating funds.”

EU leaders spurned Hungary’s request for aid at a summit in Brussels yesterday. Latvia, a former Soviet republic, will contract 6.9 percent. Growth in Poland, the biggest eastern European economy, will tumble to 2 percent, the slackest pace since 2002.

“I would advise against taking huge numbers into the debate,” German Chancellor Angela Merkel told reporters in Brussels. “I see a very different situation -- you can compare neither Slovenia nor Slovakia with Hungary.”

The ECB may cut its benchmark rate to a record low of 1.5 percent this week to spur economic growth, according to the median forecast of 55 economists surveyed by Bloomberg. The EU’s $17 trillion economy will shrink 1.8 percent this year, according to the European Commission.

European Factories

The euro stayed lower after a survey of purchasing managers by Markit Economics showed the euro region’s manufacturing industry shrank at a record pace in February, with a gauge of activity falling to 33.5, from 34.4 in the previous month. A reading below 50 indicates contraction.

The Hungarian forint led eastern European currencies lower, falling 3.1 percent to 243.84. Poland’s zloty lost 2.7 percent to 3.7669, and the Czech koruna fell 1.5 percent to 22.53.

Australia’s central bank will lower the cash target to 3 percent at a meeting tomorrow, according to the median forecast of 18 economists surveyed by Bloomberg News. New Zealand policy makers will lower the target rate by 0.75 percentage point on March 12, a separate Bloomberg survey showed.

New Zealand’s currency slid to the weakest level against the dollar in 6 1/2 years after its Treasury Department said the economy may contract more than expected this year. It fell 1.4 percent to 48.16 against the Japanese yen.

Lending Abroad

The dollar also advanced on speculation the deepening global financial crisis is spurring banks to restrict lending abroad. Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, said Feb. 26 that the U.K.’s largest government-controlled bank will cut back or withdraw from 36 of 54 countries where it operates to focus on its “heartland.”

The pound and Swiss franc will also benefit from such moves, while currencies of New Zealand and other nations dependent on international banking will suffer, according to Redeker at BNP Paribas. He predicts the dollar will strengthen about 4.8 percent to $1.20 per euro by June 30.

The yen may extend losses from its worst month in 13 years on speculation traders will keep reducing long positions in the currency, according to Standard Chartered Plc.

“With the yen continuing to weaken, we would expect to see more unwinding of yen long positions in the coming weeks,” analysts led by Callum Henderson, Singapore-based head of global currency strategy at Standard Chartered, wrote in a research note today.

Figures from the Washington-based Commodity Futures Trading Commission showed on Feb. 27 the difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called net longs -- was 28,635 on Feb. 24, compared with net longs of 36,188 a week earlier. A long position is a bet an asset will rise.

Japan’s currency weakened 7.9 percent versus the dollar in February, the poorest month since August 1995.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net