Dollar Falls to 7-Week Low Versus Euro as Yield Demand Rises

By Yasuhiko Seki and Ron Harui

July 27 (Bloomberg) -- The dollar dropped toward a seven- week low against the euro before a report economists said will show U.S. new home sales rose, adding to signs the global economy is stabilizing and damping demand for haven currencies.

The yen approached the lowest level in three weeks against Australia’s dollar as Asian stocks extended a global equity rally, spurring speculation investors are shifting to higher- yielding assets. The U.S. and Japanese currencies also weakened on prospects investors resumed carry trades after foreign- exchange volatility fell.

“Expectations that the economy will recover continue to improve,” said Yuji Kameoka, a strategist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-largest brokerage group. “An improvement of risk appetite will keep a lid on the dollar.”

The dollar fell to $1.4255 per euro as of 7:35 a.m. in London from $1.4202 in New York on July 24. It touched $1.4291 on July 23, the lowest level since June 3. The yen slid to 135.16 against the euro from 134.63. Japan’s currency fetched 94.82 versus the dollar from 94.79.

Australia’s dollar jumped to 78.04 yen, the highest since July 2, from 77.46 yen on July 24. The won rose 0.4 percent to 1,244.05 per dollar, after rising to 1,239.38 on July 21, the strongest since June 4. Indonesia’s rupiah climbed 0.5 percent to 9,953.

Asian Currencies Higher

Asian currencies were led higher by the won and the rupiah as regional stocks advanced. The MSCI Asia Pacific Index of regional shares rose 1.3 percent, extending gains to a 10th day, the longest streak since 2004. Japan’s Nikkei 225 Stock Average added 1.5 percent.

“Rising stocks will make it easier for the currencies of resource-rich nations or higher-yielding countries to attract buyers,” said Masakazu Sato, a foreign exchange adviser at Gaitameonline Co. “The Australian dollar may test 80 yen.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets.

The yen fell against 15 of the 16 most-active currencies tracked by Bloomberg. A U.S. government report will likely show new home sales rose 2.9 percent in June to a 352,000 annual rate, according to a Bloomberg News survey of economists before the release today.

Carry Trades

The yen and the dollar also fell on speculation that declines in currency volatility boosted demand for carry trades.

“With market sentiment so positive and foreign-exchange volatility falling to levels not seen since last September, the carry trade is back in vogue,” analysts led by Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a research note today. “In Asia, the only real high yielders are Indonesia’s rupiah at 6.75 percent and the Philippine peso at 4 percent.”

Implied volatility on options for major exchange rates fell to 13.21 percent on July 24, the lowest level since Sept. 29, as measured by a JPMorgan Chase & Co. index. Lower volatility indicates diminished risk of currency fluctuations that may erode profit on carry trades.

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another nation with higher interest rates.

Bernanke Comments

Losses in the dollar were tempered after Federal Reserve Chairman Ben S. Bernanke said he supports the Treasury’s “strong dollar policy.”

Bernanke’s comments came before U.S. officials including Treasury Secretary Timothy Geithner meet with Chinese counterparts today and tomorrow in Washington to discuss economic and strategic issues. The U.S. plans to sell $115 billion in Treasuries this week.

“Bernanke’s remarks may ease worries in China about the dollar as a key reserve currency,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “His comments are positive for the dollar.”

A stronger U.S. economy would bolster the dollar, Bernanke said yesterday in Kansas City, Missouri, in a town-hall-style meeting taped for broadcast on PBS television this week. He also said he expects the economy to grow at an annual rate of 1 percent in the second half, while unemployment will exceed 10 percent before beginning to decline.

DPJ Stance

The opposition Democratic Party of Japan has no plan to diversify the country’s foreign reserves away from the dollar if it wins next month’s general election, party Secretary-General Katsuya Okada said.

Okada played down comments by Masaharu Nakagawa, the party’s shadow finance minister, that Japan needs to consider avoiding foreign-exchange risk by diversifying away from U.S. bonds.

“That’s not officially approved party policy,” Okada, 55, said in a July 24 interview. He declined to comment on what Japan should do about its reserve holdings, or whether there’s an appropriate level for the yen to trade against the dollar. Finance Minister Kaoru Yosano last month said Japan had “unshakeable” faith in Treasuries.

Japan has almost $1 trillion in currency reserves and is the second-biggest foreign holder of U.S. Treasuries after China.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.