Dollar Falls to One-Year Low Versus Euro on Signs Slump Easing

By Lukanyo Mnyanda and Yasuhiko Seki

Sept. 17 (Bloomberg) -- The dollar slid to a one-year low against the euro as a report showed Europe’s trade surplus grew in July and investors bet the U.S. housing market improved last month, sapping demand for the currency as a refuge.

The Dollar Index dropped to a 12-month low as the MSCI World Index of stocks advanced for a third day, boosting appetite for higher-yielding alternatives to the U.S. currency. Demand for riskier assets also increased as Japan’s central bank raised its assessment of the nation’s economy. The Swiss franc was little changed against the euro before the Swiss National Bank’s decision on interest rates.

“People are getting more optimistic and this is driving the dollar,” lower, said Ulrich Leuchtmann, head of currency research at Commerzbank AG in Frankfurt. “With more risk appetite and improved liquidity in the market, people are again looking at interest-rate differentials.”

The dollar traded at $1.4737 per euro at 10:12 a.m. in London, from $1.4709 yesterday in New York. It earlier reached $1.4767, the weakest level since Sept. 25, 2008. The yen strengthened to 90.70 per dollar, from 90.93 yesterday, when it appreciated to 90.13, the highest level since Feb. 12. Japan’s currency was at 133.66 per euro, from 133.78 yesterday.

Australia’s currency rose to 87.48 U.S. cents, from 87.35 cents yesterday. New Zealand’s dollar was at 71.34 U.S. cents, from 71.41 cents.

Interest Rates

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 risk in such trades is that currency market moves will erase profits.

The Nikkei 225 Stock Average rose 1.7 percent and Europe’s Dow Jones Stoxx 600 Index climbed 0.3 percent. The MSCI World advanced 0.5 percent.

The 16-nation euro area’s trade surplus widened to 6.8 billion euros ($10 billion) in July, the European Union’s statistics office said in Luxembourg today. Economists had forecast an increase to 1.2 billion euros, according to a Bloomberg survey of economists. The Dutch central bank said yesterday a “slight improvement” is visible in the global economy.

The Swiss franc traded at 1.5189 against the euro, from 1.5180 yesterday. It was at 1.0304 against the dollar, compared with 1.0322 yesterday and 1.0285 earlier today, the strongest level since July 22, 2008.

SNB Meeting

The SNB, led by Jean-Pierre Roth, will leave the three- month Libor target at 0.25 percent at today’s quarterly monetary policy assessment, according to all 21 economists in a Bloomberg News survey. The SNB publishes the decision in Zurich at 2 p.m.

Traders increased bets the European Central Bank will raise its main refinancing rate by the middle of next year, with the implied yield on the three-month Euribor futures contract for June 2010 delivery rising to 1.265 percent today from 1.225 percent yesterday. Federal funds futures contracts traded on the Chicago Board of Trade show a 3 percent chance of an increase in the U.S. benchmark interest rate in December.

The Dollar Index, which tracks the U.S. currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, sank as low as 76.010 today, the weakest level since Sept. 22, 2008. It was recently at 76.133.

‘Reinforcing Confidence’

“We are getting good economic data from the U.S. that is reinforcing confidence in the global recovery,” Derek Halpenny, European head of currency strategy in London at Bank of Tokyo- Mitsubishi UFJ Ltd., said in a Bloomberg Television interview. “Until we start to see interest rates respond to the positive news from the U.S., I think the line of least resistance is to continue selling the dollar.”

U.S. builders broke ground on 598,000 new homes last month at an annual rate from 581,000 in the previous month, according to a Bloomberg News survey before the Commerce Department releases the data today.

The Philadelphia Federal Reserve Bank will report today that its index of the region’s manufacturing advanced this month to the highest level since 2007, according to the median forecast of 55 economists in a Bloomberg News survey. The index is expected to increase to 8 from 4.2 in August, with a positive reading signaling expansion.

The Bloomberg Professional Global Confidence Index rose to 58.54 this month from 58.12 in August. The index exceeded 50 for a second month, which means optimists outnumbered pessimists. Measures of confidence in France and Germany surged after their economies unexpectedly returned to growth last quarter.

‘Downward Pressure’

“Given the fragility of the U.S. economy, the Fed can’t normalize credit and monetary-easing policies,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “The bulk of highly liquid dollar assets will continue to flow into other currencies or commodities, putting downward pressure on the dollar.”

The yen rose against the dollar and the euro after Japan’s newly appointed Finance Minister Hirohisa Fujii said he doesn’t agree a weaker yen is necessarily good for exporters.

“It’s an absurd idea that the cheaper the yen is, the better for exports,” Fujii, 77, said at a press conference in Tokyo. “But it doesn’t mean higher yen is always the best.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net