By Theresa Barraclough and Ron Harui
May 22 (Bloomberg) -- The dollar fell to a four-month low against the euro and dropped versus the yen on speculation the U.S. government’s creditworthiness is weakening, sapping demand for the U.S. currency.
The yen climbed to a nine-week high versus the dollar after Japan’s Finance Minister Kaoru Yosano said the government isn’t planning to intervene in the currency market. The dollar headed for its biggest weekly loss in two months versus the euro after Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating to “negative” from “stable,” raising concern that the same may happen to the U.S. The New Zealand dollar advanced to a seven-month high.
“We’re seeing a breakdown of the correlation of risk appetite and the dollar,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia’s biggest lender by market value. “A lot of Treasuries are held by foreign investors and any concern about the value of U.S. debt will have a massive impact on dollar sentiment.”
The dollar declined to $1.3935 per euro as of 11:08 a.m. in Tokyo, after dropping to $1.3955, the lowest since Jan. 5. It has slumped 3.3 percent this week, the biggest loss since the five days to March 20.
The yen rose to 94.25 per dollar, after reaching 93.87, the strongest since March 19. The yen traded at 131.32 per euro from 131.15. New Zealand’s dollar surged 0.7 percent to 61.54 U.S. cents, after reaching 61.78 cents, the highest since Oct. 21.
Credit Quality
The dollar weakened versus 14 of the 16 most-traded currencies after U.S. Treasury yields yesterday rose the most in two weeks on concern the government will not be able to fund its fiscal spending.
“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, Singapore-based global head of currency strategy at Standard Chartered Bank, wrote in a research note today. “The first considerations will likely be hard currencies that are liquid. On these counts, the likes of the euro, yen, Australian dollar and Canadian dollar will win out.”
The cost to protect buyers of U.S. sovereign bonds for five-years climbed to a two-week high yesterday, indicating deteriorating investor perception of credit quality in the world’s largest economy. Credit-default swaps for the U.S. advanced to 37.745 yesterday, the highest since May 4, from 34 on May 20, according to CMA DataVision. The five-year CDS price for Japan fell to 50 yesterday from 50.06 on May 20.
The dollar also fell after Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. will “eventually” lose its AAA rating.
“The markets are beginning to anticipate the possibility” of a U.S. credit rating-cut, Newport Beach, California-based Gross said in an interview yesterday on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”
The dollar dropped for a fifth day versus the euro after the failure of BankUnited Financial Corp. added to concern the banking system in the world’s biggest economy remains weak.
BankUnited was in an “unsafe condition” and the quality of its loan portfolio had deteriorated, the Office of Thrift Supervision, the lender’s main regulator, said yesterday. BankUnited joined 33 banks and at least five credit unions that have gone under since January.
The administration of President Barack Obama will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. The U.S. Treasury reported the first budget deficit for April in 26 years, recording a $20.9 billion shortfall.
Dollar Index
The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 0.2 percent to 80.336 after dropping to 80.21, the lowest since Dec. 29.
The dollar fell to a four-month low of 1.0895 Swiss francs from 1.0936, and slipped to $1.5897 per pound, the weakest since Nov. 6. The U.S. dollar fell to C$1.1334 from C$1.1374 yesterday, after earlier reaching $1.1328, the weakest since Oct. 14.
The yen headed for a thirdly weekly gain versus the greenback after Japan’s Finance Minister Yosano said the “government isn’t considering currency intervention at this point.” Policy makers haven’t fully analyzed why the yen is gaining, he said at a press conference in Tokyo.
“We are seeing the appreciation of the yen, but mainly because of the negative views on the U.S. economy,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “It would be hard for the Japanese government to change the direction of the market because it’s more of a dollar-weakness issue rather than a yen-strength issue.”
-- Editors: Nicholas Reynolds, Nate Hosoda
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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