Dollar Falls Versus Euro as U.S. Stock Gain Eases Safety Demand

By Ye Xie and Sapna Maheshwari

Aug. 19 (Bloomberg) -- The dollar dropped versus the euro as a rebound in U.S. stocks eased investor demand for safety triggered by a tumble in Chinese shares.

The yen and Swiss franc gained against currencies including the New Zealand dollar as the Shanghai Composite Index briefly fell into a bear market. Sterling weakened versus the euro after minutes of the Bank of England’s policy meeting showed Governor Mervyn King favored a bigger increase in asset purchases.

“In the longer term, medium term, we think it’s a risk- friendly environment,” said Achim Walde, head of currencies at Oppenheim KAG in Frankfurt, where he helps oversee 3 billion euros ($4.3 billion) in assets. “We should see an upward revision in growth.”

The dollar declined 0.7 percent to $1.4233 per euro at 4:04 p.m. in New York, from $1.4136 yesterday. The yen appreciated 0.7 percent to 94 per dollar, from 94.69, after trading at 93.67, the strongest level since July 23. The yen was little changed at 133.80 per euro after touching 132.20, the strongest level since July 22.

Now is a good time to sell the dollar and buy those currencies sensitive to global economic recovery, including the Norwegian krone, according to Walde.

The krone gained 0.8 percent to 6.0603 per dollar after crude oil for September delivery increased 4.4 percent to $72.24 a barrel as U.S. inventories declined the most in more than a year. Norway is the world’s fifth-largest oil supplier.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro, yen, pound and franc, dropped 0.6 percent to 78.472, erasing its gain as U.S. equities and crude oil increased.

The U.S. currency’s decline versus the euro accelerated after breaching $1.4175, where traders had preset orders to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey.

The greenback is threatened by the “gusher of federal money” that rescued the financial system, the billionaire investor Warren Buffett wrote in a New York Times commentary.

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, wrote. The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, he said.

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and Federal Reserve spent billions more on separate programs to rescue financial institutions and resuscitate the banking system.

Greenback’s Status

The dollar will drop the most against emerging-market counterparts as it loses its status as the world’s main reserve currency, Curtis A. Mewbourne, portfolio manager at Pacific Investment Management Co., which runs the world’s biggest bond fund, wrote on the company’s Web site.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

The dollar’s share of global central banks’ foreign reserves increased to 65 percent in the first three months of this year, from 64 percent in the previous quarter, according to the International Monetary Fund. The greenback’s share has been about 65 percent over the past five years after falling from 72.7 percent in 2001.

Stronger Yen

Japan’s currency appreciated 0.8 percent to 63.35 against the New Zealand dollar, and the franc advanced 0.3 percent to 1.5161 versus the euro. The yen and franc typically rise during times of financial turmoil because Japan’s and Switzerland’s trade surpluses reduce the nations’ reliance on foreign capital.

The Shanghai Composite Index slumped 4.3 percent, leading other Asian gauges lower. It briefly extended its losses to more than 20 percent from this year’s high reached on Aug. 4, meeting the definition of a bear market. The Standard & Poor’s 500 Index rose 0.7 percent after earlier dropping 0.9 percent.

The sell-off in higher-yielding assets and the yen’s outperformance may be short-lived as the global economic recovery takes hold, according to Dale Thomas, head of currencies in London at Insight Investment Management, which oversees $121 billion.

‘Storm to Pass’

“I don’t think that’s the start of a big new trend,” said Thomas. “We’re pretty much going to sit on the fence” and “wait for the storm to pass,” he said.

The pound weakened 0.9 percent to 86.09 pence per euro and dropped 0.2 percent to $1.6536 after earlier losing 1.1 percent.

The Bank of England’s Monetary Policy Committee voted 6-3 to raise the amount it will spend as part of its quantitative- easing program by 50 billion pounds ($82 billion), according to minutes of the Aug. 6 decision released by the central bank today in London. King, Timothy Besley and David Miles dissented in favor of a 75 billion pound expansion.

The central bank is spending 175 billion pounds to buy assets in a move aimed at pushing down borrowing costs to revive the U.K.’s shrinking economy.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Sapna Maheshwari in New York at smaheshwar11@bloomberg.net