By Yasuhiko Seki and Ron Harui
May 13 (Bloomberg) -- The dollar fell to a seven-week low against the euro and the yen weakened after Chinese reports added to signs the worst of the global economic slump is over, sapping demand for the U.S. and Japanese currencies as a refuge.
The Dollar Index declined to a four-month low after former U.S. comptroller general David Walker wrote in a Financial Times opinion piece that the nation’s AAA credit rating may be cut because the government can’t control spending. Australia’s dollar strengthened after better-than-expected Chinese retail sales data spurred optimism the world’s third-largest economy is improving, boosting demand for higher-yielding assets.
“Euphoria-driven price action is at work as economic data at home and abroad support the view that the worst of the global recession may be over,” said Kengo Suzuki, manager of the foreign bond trading department at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “Safe-haven currencies will stay out of favor, reflecting an improvement in risk appetite.”
The dollar fell to $1.3679 per euro at 7:19 a.m. in London from $1.3648 yesterday in New York. It earlier touched $1.3722, the weakest level since March 23. The yen dropped to 132.02 per euro from 131.63. The U.S. currency traded at 96.52 yen from 96.45. It earlier weakened to 95.79, the lowest since April 28.
China’s retail sales rose 14.8 percent in April from a year earlier, after climbing 14.7 percent in March. That compared with economists’ median estimate of a 14.5 percent gain. Industrial output rose 7.3 percent from a year earlier after gaining 8.3 percent in March.
The Nikkei 225 Stock Average gained 0.5 percent and the MSCI Asia Pacific index of regional shares added 0.5 percent.
‘Crucial’
Australian dollar rose for a second day against the U.S. currency, climbing to 76.87 U.S. cents from 76.50 cents yesterday. It advanced to 74.19 yen from 73.78 yen.
Developments in emerging Asia “will be crucial” for the Australian dollar, analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy for BNP Paribas SA, wrote in a note to clients yesterday. “The Australian dollar is likely to remain an outperformer.”
Australia’s currency rose more than 20 percent against the yen in the past three months on speculation investors resumed carry trades, in which they get funds in countries with low borrowing costs and buy assets where rates are higher. The risk is that currency fluctuations can wipe out gains. Japan’s 0.1 percent target lending rate compares with 3 percent in Australia.
The U.S. government should create a “fiscal future commission” to rein in the country’s finances because its AAA credit rating may be lowered, Walker wrote in the Financial Times today. The commission should consider every option including budget controls and tax hikes, he said.
‘Underlying Risk’
“The FT article came as a reminder of the biggest underlying risk for the dollar,” said Osamu Takashima, chief foreign exchange analyst at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest bank. “If people start to question seriously the U.S.’s ability to sell swelling debt smoothly, the dollar may be sold to 90 yen and $1.40 per euro.”
The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell to 82.096 from 82.306 yesterday. It earlier reached 81.871, the lowest since Jan. 9.
“There’s a developing backlash against the dollar,” said Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Sydney. “There has been some chatter about its fundamentals with a Financial Times editorial talking about it maybe losing its AAA rating. That’s set people off on a negative bent.”
When the Daily Telegraph on April 24 carried an article warning of the downgrade risk for U.K.’s sovereign debt rating, Britain’s pound slumped more than 1 percent against the dollar and the yen.
Standard & Poor’s
Standard & Poor’s cut Ireland’s credit rating to AA+ from AAA in March as financial turmoil drove up borrowing costs and swelled the nation’s budget deficit. S&P lowered the ratings of Spain, Portugal and Greece in January. Moody’s placed Ireland’s Aaa rated government bonds on review for a possible downgrade on April 17, citing the nation’s “severe economic adjustment.”
The euro gained for a second day against the dollar before a European Union report today that may show the contraction in industrial production slowed in March, adding to signs the recession in the 16-nation region is easing.
European Central Bank governing council member Nout Wellink said in an interview with Dutch public television VARA yesterday the deterioration of the European economy seems to be slowing.
‘Slump Is Waning’
“Investors are putting funds in higher-yielding, emerging- market assets including those in Europe amid the view that the worldwide slump is waning,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is why the euro and the Australian dollar are being bought.”
Industrial output in the euro area fell 17.6 percent in March from a year earlier, after a 18.4 percent decrease in February, according to a Bloomberg survey of economists. The report is due at 11 a.m. in Luxembourg.
Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.
Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.
“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.
To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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