Dollar Gains as Russia Rate Cut Spurs Concern Rebound to Falter

By Matthew Brown and Yoshiaki Nohara

Sept. 29 (Bloomberg) -- The dollar advanced to a two-week high versus the euro as evidence economies have yet to shake off the worst effects of the global recession reduced demand for higher-yielding assets.

The U.S. currency strengthened as Russia’s central bank cut its main interest rate, reviving concern policy makers have more work to do to spur a recovery. The yen slid against the dollar after Japan’s finance minister said the government may take action in markets to curb gains that are hurting exports.

Russia’s rate cut “is a signal that things are not as positive as they appeared previously,” said Adam Cole, head of global currency strategy at Royal Bank of Canada Europe Ltd. in London. “That’s positive for the dollar.”

The dollar climbed 0.4 percent to $1.4558 per euro at 7 a.m. in New York, from $1.4622 yesterday, and touched $1.4537, the strongest level since Sept. 14. The yen depreciated 0.4 percent to 89.96 per dollar, from 89.63, after reaching 88.24 yesterday, the strongest level since Jan. 23. Japan’s currency was little changed at 130.94 per euro.

The ruble was little changed at 30.1195 per dollar after Bank Rossii cut its refinancing rate to 10 percent from 10.5 percent. The bank lowered borrowing costs seven times since April 24, including a quarter-point reduction on Sept. 14.

The yen fell against the dollar for the first time in four days after Finance Minister Hirohisa Fujii said he may intervene in foreign-exchange markets.

“If the currency market moves abnormally, we may take necessary steps in the national interest,” Fujii said at a news conference in Tokyo today. He denied saying he tolerates a stronger yen.

Fujii on Yen

As the Democratic Party of Japan, or DPJ, came into power for the first time two weeks ago, Fujii said the idea of a weaker yen helping the nation’s exports is “absurd” and he opposed governments stepping into currency markets “in principle.” Central banks intervene in foreign-exchange markets by selling and buying currencies.

The yen gained about 16 percent versus the dollar in the past year, making Japanese products shipped abroad more expensive and eroding the value of exporters’ repatriated profits. The DPJ has said a stronger currency may benefit households by making imported goods cheaper.

Japanese companies said they can remain profitable as long as the yen trades at 97.33 per dollar or weaker, according to a Cabinet survey released on April 22. Exports account for 12 percent of Japan’s economy, compared with 6 percent in the U.S.

‘Losing Momentum’

“The yen’s recent gains, fueled by market interpretation of Fujii’s comments, are losing momentum,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp.

South Korea’s won led gains among Asian currencies after the nation’s central bank forecast a seven-month run of current- account surpluses will extend through to the end of the year.

The won was also supported by a report saying affiliates of Samsung Group, the nation’s biggest family-run industrial group, have based their business plans for next year on an exchange rate that’s about 8 percent stronger than the current level.

“The fact that there is improvement in the balance of payments and current-account surplus will provide another layer of support for the Korean won,” said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment-banking unit of Credit Agricole SA. “The won will benefit from flows and improvement in the capital position.”

The won climbed 0.8 percent to 1,186.00 per dollar as of the close of trading in Seoul. It touched 1,184.93 yesterday, the strongest level since October 2008.

European Sentiment

The euro fell against the dollar even as a report showed European confidence in the economy increased to the highest level in 12 months in September. An index of executive and consumer sentiment in the 16-nation euro region rose to 82.8, from 80.8 in August, the European Commission in Brussels said today. That was the sixth straight monthly gain.

The U.S. currency also advanced after European Central Bank President Jean-Claude Trichet told lawmakers in Brussels yesterday the “solidity of the dollar is very important” for the world economy. The euro reached a one-year high of $1.4844 on Sept. 23.

Japan’s Toyoo Gyohten, who is slated to become an adviser to Finance Minister Fujii, also expressed support for the dollar, indicating the DPJ may keep buying U.S. Treasuries, extending the policy of the former government.

“There’s no better alternative to the dollar,” Gyohten, 78, said in an interview yesterday in Tokyo. “Making it as stable as possible would be the best policy option at the moment.”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net